The Goods and Services Tax (GST) Council has convened a crucial two-day meeting to deliberate on a sweeping overhaul of the nation's tax framework. The central proposal, dubbed a "next-generation" reform, seeks to fundamentally simplify the current four-tier GST structure by consolidating it into just two slabs. If approved, this move would represent the most significant tax restructuring since the GST's implementation in 2017, promising to make a wide range of consumer goods cheaper while increasing the cost of select luxury and "sin" products.
The core of the proposed reform is the elimination of the 12% and 28% tax brackets, streamlining the system into just two primary rates: 5% and 18%. This ambitious plan is designed to reduce tax complexity and boost consumption across the economy. Under this new framework, the vast majority of goods currently taxed at 12% would be moved into the lower 5% category. This includes numerous everyday essentials such as ghee, nuts, packaged drinking water, various medicines, and medical devices. Common household items like pencils and umbrellas are also slated for this reduction.
Furthermore, the proposal aims to make electronic appliances more affordable. A significant number of products that are currently in the highest 28% bracket, including certain televisions, washing machines, and refrigerators, would be shifted to the more moderate 18% slab. This targeted reduction is expected to provide a significant boost to the consumer durables market and offer tangible relief to middle-class households.
While the reform is largely focused on tax reduction, it also introduces a new, higher tax category for specific items. The government plans to create a special 40% slab dedicated to luxury and demerit goods. High-end automobiles, SUVs, and other premium vehicles, which are presently taxed at 28% plus a compensation cess, would likely be the first to be moved into this new, higher bracket. Similarly, products like tobacco, pan masala, and cigarettes are also expected to be classified under this 40% rate, with the possibility of an additional levy being applied to further discourage their consumption. The proposal also brings electric vehicles (EVs) into focus, with the Centre advocating for a 5% GST to encourage adoption, though a debate continues over whether premium EVs should face a higher tax rate.
The proposed overhaul has not been met with universal approval. A coalition of opposition-ruled states—including West Bengal, Kerala, Tamil Nadu, and Karnataka—has expressed significant apprehension about the potential impact on their finances. They argue that the sweeping tax cuts could lead to a substantial dent in state revenues, a critical concern now that the Centre's five-year revenue loss compensation mechanism, established in 2017, has expired. These states are demanding the creation of a clear new compensation framework to protect their fiscal stability. They are expected to coordinate their strategy ahead of the final council vote, making this a key point of contention in the discussions. The reform, which follows a promise made by Prime Minister Narendra Modi to simplify the tax regime, has already received an in-principle endorsement from a Group of Ministers, setting the stage for one of the most consequential GST Council meetings to date.
· Major Tax Overhaul: The GST Council is considering a proposal to simplify the current four-tier tax structure into just two slabs: 5% and 18%.
· Cheaper Consumer Goods: The reform would make many daily essentials (like ghee, nuts, medicines) and electronic appliances cheaper by moving them from the 12% and 28% slabs to lower rates.
· New Luxury Tax: A new 40% tax slab is proposed for luxury and "sin" goods, including high-end cars and tobacco products, which would become more expensive.
· State-Level Pushback: Several opposition-ruled states are concerned about potential revenue losses and are demanding a new compensation mechanism from the Centre before agreeing to the changes.
