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While prime minister Narendra Modi announced the revamp of the eight-year indirect tax in his Independence Day speech here on Friday, as a “Diwali gift” to India’s consumers, the finance ministry later later posted on X that the move would “enhance affordability, boost consumption, and make essential and aspirational goods more accessible to a wider population.” The ministry added the proposed overhaul of the GST would rest on three pillars — structural reforms, rate rationalisation and ease of living.
Proposed GST Structure and Rate Changes
Official sources said that the ministry has sent a “holistic” proposal to a Group of Ministers on Rate Rationalisation, whereby the tax could have a 5% merit rate and a standard levy of 18%. Besides, a small number (five to seven) “demerit items” could be moved to a special rate of 40%, the higher threshold allowed under the current GST laws.
The restructuring would also lead to removal of the “compensation cess’ by December, given that cess proceeds to be collected by November would suffice to repay the loans taken to bridge a shortfall in the relevant kitty.
The GoM and other groups concerned would firm up the proposals in the coming weeks, so as to make it convenient for the GST Council to meet in September-October (much before Diwali on October 20) to take the decisions, the sources added.
Currently, GST has a four-tier tax structure of 5%, 12%, 18% and 28% (plus cess), besides the special rates for gold and gems. Essential items including unprocessed food are exempt, while a number of mass consumption items are taxed at the lower tax bracket of 5%. A clutch demerit and luxury items are taxed at 28% plus cess, with the actual tax incidence for some tobacco products being as high as 88%. An official said tax incidence will be the same on sin goods like tobacco, gutka and cigarettes as before (more than 40%), but did not elaborate how it will be done.
The Centre suggested that tools and machineries used by farmers should attract a lower tax rate which could increase productivity and mechanisation. The GST on health and life insurance may attract 5% tax instead of 18% now, with input tax credit. Tax rates may also be lowered for the renewable energy sector, handicrafts and pharmaceuticals and medical devices.
As much as 70% of the GST revenue is currently moblised from 18% slab, which covers all fast-moving consumer goods, most services, consumer durables, industrial intermediates, building materials except cement, furniture etc. The special slab of 40% will be restricted to tobacco products, pan masala etc., while a clutch of items in that bracket, including cement, air conditioners, and even some small cars, may now be shifted to 18% slab. It is also possible that online gaming, which is being treated by policy circles as tantamount to gambling, could attract 40% tax.
Experts have long been advocating the need for simplifying the GST structure, and stressed that this is necessary for it to produce an “output effect” and boost economic output. Short-term revenue interests of some state governments have, however, delayed the reform.
Though the weighted average GST rate has come down to around 11% from around 15.5% at the time of tax’s launch, the GST revenues have in the last couple of years shown much buoyancy. The rate revamp could result in a further reduction in the average rate, though it might not have a material adverse impact on the revenues, with the likely boost to consumption.
The reforms will also seek to reduce classification-related disputes, correct inverted duty structures in specific sectors like textiles and fertilisers, ensure greater rate stability, and further enhance ease of doing business, the ministry said. To address the inverted duty structure, the Centre proposed same rates for both inputs and outputs,in what would free up working capital for firms.
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The finance ministry also suggested in 95% of cases, GST registration should be complete in three days. It recommended pre-filled returns and faster release of refunds in an automated manner to give relief to exporters and the units hit by inverted duty structures.
“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.
For the last three years, the gross collections hovered around 6.7% of GDP, though it was much higher than the levels in the initial years of the tax. Experts feel that generating further buoyancy will depend on how the tax’s structure is revamped and simplified. Benign tax rates could lead to improved compliance, and a widening of the tax base, they contend.