Centre proposes fewer GST rates: only 5% & 18% to remain, tax on common-use items slashed

The Centre has proposed to reduce the number of slabs under the Goods and Services Tax system, retaining the 5% and 18% slabs, while introducing a lower concessional rate below 1% and a high “sin rate” of 40% on just five to seven items, according to official sources. 

This would entail entirely doing away with the 12% and 28% tax brackets. Of these, 99% of items currently in the 12% slab will be moved to the 5% rate and 90% of goods and services in the 28% bracket will move to 18%. There will be no cess of any kind over and above the GST rates. 

These reforms would be part of a “Deepavali gift” from the Centre in the form of “next-generation GST reforms”, Prime Minister Narendra Modi announced during his Independence Day speech at Delhi’s Red Fort on Friday. The reforms will bring down “tax burden on the common man”, he added.

“There will of course be a hit to revenue, but it will not be so huge as to materially affect the fiscal deficit,” an official said. “The thinking is that the lower rates will increase consumption, reduce evasion, and widen the tax net, which will increase revenues by the end of the financial year.”

Up to the States now

The Ministry of Finance, in a press release issued soon after the speech, said that the Union government has sent its proposal on GST rate rationalisation and reforms to the Group of Ministers (GoM), which has been constituted by the GST Council to examine the issue.

It added that the GST Council would deliberate in its next meeting — likely be held in September or October, according to sources — on the recommendations of the GoM and would strive to implement the bulk of the reforms within this financial year.

The Centre would be engaging with the States over the next few weeks to achieve a consensus on these reforms. The reason the Centre had to put forth such a proposal in the first place, the source confirmed, was because the GoM tasked with simplifying the GST only comprises representatives of the States.

“Even though the Centre is part of the GST Council, it has no voice when it comes to these changes, such as rate rationalisation or what happens with insurance,” a source explained. “And so we had to submit our proposal to the GoM.”

It is now up to the States to accept or reject the proposals, the source added.

Revenue impact

According to sources, the 28% tax slab currently accounts for 11% of the revenue from the GST, the 12% slab accounts for 5%, and the 5% slab accounts for 7% of the revenue. The bulk of the revenue — around 67% — comes from the 18% slab.

The Centre has also proposed that the rates on aspirational items, such as white goods, would be reduced. Air conditioners are currently taxed at 28%, which will see a reduction, while other white goods currently taxed at 18% could potentially see their rates reduced as well. This includes daily-use items such as toothpaste, soap, and shampoo.

“A few years ago, the Reserve Bank of India calculated that the average GST rate in India had settled at 11.6%, which will now substantially come down,” the first source explained. “The idea is that similar items will be taxed the same, so, for example, all namkeen (savouries) will be taxed at the same rate.”  

They added that there would be only five to seven “sin goods”, such as tobacco and gutka, in the 40% category, while the concessional rate of less than 1% would apply to the few items that are currently taxed below 5% and above 0%. These include precious metals like gold and silver (currently taxed at 3%) and semi-precious stones (currently taxed at 0.25%). 

“Nothing has been added to this list of concessionary items,” the source asserted. 

Other reforms

To promote “ease of living”, the Centre has proposed using technology to speed up and ease the GST registration process and implement pre-filled returns, thus reducing manual intervention and eliminating mismatches, while refunds could be processed in a faster and more automated manner. 

“One of the more consequential proposals in terms of ease of living is to correct the inverted duty structure for most goods since this was leading to working capital issues,” a source explained. 

An inverted duty structure is when the tax rate of a product is lower than the tax rate of the inputs that go into its production. The government reimburses companies for this inversion, but delays for any reason lead to the companies’ working capital being locked up, which affects their ability to invest in new business.