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On Friday, PM Modi highlighted the importance of reforms under GST, which would bring relief to the common man, farmers, middle class and MSMEs. The Finance Ministry is also “confident” that the GST council would welcome the proposal.
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As part of its vision to build an ‘Atmanirbhar Bharat’, the Centre is pushing GST reforms based on three pillars: structural changes, rate rationalisation, and ease of living.
An internal analysis by the Department of Revenue, under the Finance Ministry, suggested that gross GST revenues under the proposed two-slab structure of 5 per cent and 18 per cent would remain at least as high as current collections. Most goods and services are expected to fall within these two brackets.
For instance, items used common man or inputs critical to farmers, small entrepreneurs, and MSMEs would attract 5 per cent GST. This would not only reduce their tax burden but would also encourage consumption. The rest would be taxed at 18 per cent.
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At present, there are multiple rate slabs – 5 per cent, 12 per cent, 18 per cent and 28 per cent – along with a compensation cess from 1 per cent to as high as 290 per cent on certain items and luxury goods such as cars, refrigerators, air conditioners, pan masala, tobacco and cigarettes.
The Centre plans to introduce a special 40 per cent GST rate after loans taken to pay compensation cess to states are fully repaid by November–December. While most goods will come under this rate, items like tobacco may need a separate mechanism since their tax rate is much higher. Though revenues may dip initially, higher compliance and consumption are expected to make up for it. A rollout is being considered before Diwali to give industries time to adjust and avoid disruption during the festive season.
5 GST slabs to two standard ones
“In the eight years of GST, there has so far been patchy tinkering of tax rates and slabs. That piecemeal addressing of problems with the tax regime has only complicated the structure further and has ended up with a system that is even more complicated and layered than what was originally envisaged. What we are doing now is a holistic revamp of the tax system with two main rates that will be the two pillars of the tax regime,” The Indian Express cited a source as saying.
The source also said that structural reforms would be complemented by improving the process, including smoother registration, faster refunds, and changes to how automated notices are generated to ensure a more user-friendly interface.
The government is proposing measures such as pre-filled returns to reduce manual errors, faster automated refunds, and a simplified rate structure. The plan is to reduce the current five GST slabs to two standard rates (5% and 18%) plus a special 40% rate for select items. Officials said this rationalisation will simplify compliance, reduce disputes, and boost revenue, unlike the 2018 rate cuts that led to losses and tax evasion.