The Goods and Services Tax (GST) is expected to see its biggest tax reset this Diwali. The proposed overhaul, following an eight-year wait, will lower the tax burden, with daily-use items becoming cheaper, as announced by Prime Minister Narendra Modi during his Independence Day speech. Hours later, the Ministry of Finance proposed a two-slab GST rate structure to the Group of Ministers, along with special rates for select items. Being a consumption tax, lower GST levies will ease inflationary burden on households, and importantly, strengthen the economy. Coming close on the heels of personal income tax changes, the anticipated rate reduction will likely boost consumption, which has been punching below its potential. Notwithstanding domestic challenges and global headwinds, monthly collections have been showing remarkable buoyancy, and July’s haul, touching an impressive ₹1.96 lakh crore, only indicates economic vitality. That said, it needs urgent and simultaneous changes, including tax slabs, input tax credit norms, e-invoicing, and the establishment of the GST Appellate Tribunal.
Notable among all is rate rationalisation. With five slabs, the current rate structure is anything but simple. About 21 percent of goods are currently taxed at 5 percent, while the 12 percent rate applies to 19 percent of items, and 44 percent are taxed at 18 percent. Interestingly, 70-75 percent of GST revenue in FY24 came from the 18 percent slab, while 5-6 percent was from the 12 percent bracket, 6-8 percent from the 5 percent slab, and the highest tax slab of 28 percent contributed 13-15 percent revenue. While the GST Council will discuss various options of merging existing slabs, it’s essential to ensure that items like daily use items currently under the lowest slab and pharma products taxed at 12 percent don’t become expensive. Then there are other key proposals like zero GST on health and term life insurance, which also need a closure.
The contentious issue of compensation cess also needs to be dealt with. Introduced to shield states from potential revenue losses during the transition period, it was later extended till March 2026, to tide over the debt incurred during the Covid-19 crisis. Other deeper reforms include getting aviation turbine fuel, electricity, liquor, and petroleum into GST’s fold. This has been a sensitive no-go area, given that they contribute meaningful revenue to states’ coffers, and forging a consensus will need joint efforts by both the Centre and the states.