Next-gen GST reforms by Diwali, says PM Modi; just two rates: 5% & 18% | Business News

“This would enhance affordability, boost consumption, and make essential and aspirational goods more accessible to a wider population,” the Ministry of Finance said in a statement.

The Central government’s proposal, expected to come into effect by October, would mark a significant change in the GST design eight years after its rollout. It has suggested replacing multiple slabs — 5 per cent, 12 per cent, 18 per cent and 28 per cent — with a broad two-slab structure — 5 per cent and 18 per cent — in addition to a 40 per cent special rate for sin and demerit goods, sources in the know said.

As per the proposal, 99 per cent of items in the current 12 per cent slab are set to be moved to the 5 per cent slab, while 90 per cent of goods and services currently at 28 per cent would shift to the 18 per cent tax slab. Common-use items will continue to be in the zero or 5 per cent slab, while rates below 5 per cent for gems and jewellery, gold, diamonds will remain unchanged.

Currently, the topmost GST slab is 28 per cent on top of which compensation cess, ranging from 1 per cent to 290 per cent, is levied on sin and luxury goods such as cars, refrigerators, air conditioners, pan masala, tobacco and cigarettes. With compensation cess coming to an end by November-December as compensation-related loans get repaid, the cess rates are proposed to be subsumed to a uniform rate of 40 per cent. The special rate of 40 per cent would be levied on only about seven items as the Centre has proposed shifting cement and white goods into the lower tax bracket of 18 per cent.

Sin goods will continue to face the same tax incidence, sources said. For instance, tobacco, a sin good, will continue to face the same tax incidence of 88 per cent that exists today, sources said. Online gaming, which currently faces 28 per cent levy, is likely to attract the topmost 40 per cent GST rate.

Though there might be an initial impact on revenues, the gains from higher compliance and consumption are expected to offset the losses, sources said. “In line with the Laffer curve, reduced tax rates are expected to result in higher consumption and bring more people into the GST base,” a source said.

“It is the time to seize the moment and undertake this holistic reform for easing compliance and lower tax burden for common people,” the source said.

In its statement, the Ministry of Finance said it has already sent its proposal to the ministerial panel for GST rate rationalisation. “The Central Government has sent its proposal on GST rate rationalisation and reforms to the Group of Ministers (GoM) constituted by the GST Council to examine this issue,” it said.

Sources said the GST Council, the overarching federal body with members from both the Centre as well as states, is likely to meet next month, and may hold multiple meetings, in the run-up to Diwali since decisions involving rate reductions that could potentially result in revenue losses will need to be discussed threadbare. The last meeting was held in December 2024.

The reforms also seek to reduce classification-related disputes, correct inverted duty structures in specific sectors such as textiles, ensure greater rate stability, and further enhance ease of doing business. “These measures would strengthen key economic sectors, stimulate economic activity, and enable sectoral expansion,” the Ministry said.

It said the end of compensation cess has created fiscal space, providing greater flexibility to rationalise and align tax rates within the GST framework for long-term sustainability.

With the Central government’s proposal involving a complete overhaul of rates, this would imply a careful item-by-item consideration of approximately 1,500 categories of goods and services in the GST Council meeting.

In its last meeting held in Jaisalmer in December 2024, the GST Council had held discussions on lowering rates on several items. However, it had decided to defer a key decision to lower the tax rate on health and life insurance premiums. As per the proposal, exemption for premiums paid by senior citizens for health insurance and premiums paid by all for term life insurance was under consideration.

The potential revenue losses from the major tweaks in GST rates are likely to be met by resistance from states as it may further strain their fiscal health. The earlier rate rationalisation proposals have been unpalatable to many states, both BJP-ruled and Opposition, as several attempts to simplify or reduce rates on consumer-focused items were stalled before in the GST Council.

As per government data for 2023-24 shared in Parliament last year, around 70-75 per cent of the GST revenue came from 18 per cent tax slab, while the 12 per cent slab contributed 5-6 per cent of the GST collections. The lower 5 per cent slab accounted for 6-8 per cent of the GST, while the higher 28 per cent slab’s share was 13-15 per cent.

Since the proposals would involve revenue losses, there are apprehensions that some states may resist the tweaks, which could also result in voting being conducted in the GST Council meeting. The Finance Ministry said the Centre is committed to working closely with the states in the “true spirit of cooperative federalism”. “It will be building a broad-based consensus with the States in the coming weeks, to implement the next generation of reforms as envisioned by Prime Minister Shri Narendra Modi,” it said.

The GST Council, when it meets next, will deliberate on the recommendations of GoM, and every effort will be made to facilitate early implementation so that the intended benefits are substantially realised within the current financial year, the Ministry said.

The GST rate rationalisation has been talked about for over four years now. In its 45th meeting held in September 2021 in Lucknow, the GST Council discussed the need to undertake rate rationalisation including correction of inverted duty structure, to reduce classification related disputes, and enhance GST revenues. The Council then approved changes in GST rates to correct inverted duty structure in many sectors, including textiles and footwear that were brought into effect from January 2022.

Multiplicity of rates and the complex structure of the GST have come under scanner several times over the eight-year period since its rollout. A single GST rate was, however, ruled out by the then Finance Minister Arun Jaitley. In June 2018, Jaitley had said that a single rate is a “flawed idea”: “Should we have the same rate for food items, hawai chappals and BMW cars?” In December 2018, Jaitley had said that as revenue would rise “significantly”, a standard rate between 12 per cent and 18 per cent will be fixed under GST. “The country should eventually have a GST which will have only slabs of zero, 5 per cent and standard rate with luxury and sin goods as an exception,” he had said.