The Central government is preparing a major restructuring of the Goods and Services Tax (GST) system. The plan is to eliminate the 12% and 28% tax slabs. Most products and services will shift to the 5% and 18% categories. A small group of sin goods such as tobacco will move to a new 40% slab. This proposal is expected to go before the GST Council by September or October 2025.

What Will Change

• 12% slab scrapped. Goods like sugar, jams, insulin, diagnostic kits, and handbags will move to 5% or 18%.
• 28% slab scrapped. Items like cement, air-conditioners, dishwashers, and SUVs will shift to 18%.
• A new 40% slab for sin goods such as tobacco.
• Special rates will continue, such as 3% for gold, silver, and precious stones.

Why the Change

The government wants a simpler GST with fewer slabs. The goal is to stimulate demand and reduce tax disputes. Prime Minister Narendra Modi called it a “double Diwali” for consumers during his Independence Day speech.

The reform follows recent income tax reliefs and a 100-basis-point repo rate cut by the Reserve Bank of India. Together, these moves aim to support consumption and economic growth.

Short-Term Revenue Impact

Officials admit that the shift will lower government revenue in the short term. But they expect higher consumption to make up for the loss over time. The government also plans to simplify registration and improve refund processes, which will benefit small businesses and startups.

Who Benefits Most

• Auto components and automobiles: Lower tax on many parts and some vehicles.
• Textiles and fertilizers: Correction of inverted duty structures will reduce input costs.
• Healthcare and medical devices: Items like insulin and diagnostic kits will be cheaper.
• Insurance services: Likely to move to 18% instead of 28%.
• Handicrafts and tableware: Shift to lower slabs will make products more affordable.

Impact on Consumers

Consumers will see lower prices on many mass consumption goods. This benefits rural households and lower-to-middle-income groups in urban areas. Everyday items like sugar, preserved food, kitchenware, and healthcare products will become more affordable.

Impact on Businesses

Businesses will gain from:

• Fewer tax slabs, reducing classification disputes.
• Faster refunds of input tax credit.
• Correction of inverted duty structures.
• Lower compliance costs with simpler registration.

Small enterprises and startups will find compliance easier, which supports entrepreneurship.

The End of GST Compensation Cess

The government has already ended the GST compensation cess. This created fiscal space for the reform. The cess had been applied to SUVs, tobacco, and sugary drinks. Its expiry provides room to rationalize tax rates while keeping the GST system sustainable.

Movement Towards a Two-Rate System

The reforms signal a shift towards two main slabs: 5% and 18%. There will also be a demerit rate of 40% on select goods and a few special rates like 3% for precious metals. This will make GST easier to understand and comply with.

Expert Views

• EY India: The reforms will enhance growth by supporting demand and reducing business costs.
• KPMG: The move balances simplicity with fiscal prudence and reduces litigation.
• Government officials: While revenue falls in the short term, higher consumption will offset the loss.

Connection to Broader Tax Reforms

These GST changes come after large income tax reliefs and other tax measures. To understand how tax savings work for individuals, you can read:

• Multiple Taxation in India Explained
• Section 80C Complete Guide to Tax Saving
• NPS Employer Contribution Section 80CCD(2)
• NPS Tax Benefits for Employees 80CCD(1) and 80CCD(1B) Explained
• Section 80D: Smart Tax Saving with Health Insurance
• Old Tax Regime vs New Tax Regime

What This Means for You

• Expect cheaper prices on common goods.
• Small businesses will have easier compliance.
• Auto, textile, healthcare, and insurance sectors will gain.
• Luxury items will stay taxed higher with the new 40% slab.

Final Word

The GST reform is a big step towards a simple, efficient tax system. You will pay less tax on mass consumption goods. Businesses will face fewer disputes and lower costs. While the government will lose some revenue at first, higher demand should make up for it. The GST Council’s decision in September or October will confirm the details.

Source: livemint.com