“GST Council Meeting: India Awaits Major Tax Rate Cuts and Rationalisation”

In a highly anticipated development poised to reshape India’s economic landscape, the GST Council has commenced a critical meeting to deliberate on a wide-ranging agenda of rate rationalisation and cuts. The two-day session, led by the Union Finance Minister and comprising finance ministers from all states and Union Territories, is widely expected to introduce a “next-generation” GST regime aimed at simplifying the tax structure, boosting consumption, and streamlining compliance for businesses.

The Proposed “GST 2.0” and a Simplified Tax Structure

The central focus of the meeting is a proposal to overhaul the existing four-tier GST structure of 5%, 12%, 18%, and 28%. The proposed reform seeks to consolidate these into a simplified two-slab system of 5% and 18%. This significant shift is a key recommendation from the Group of Ministers (GoM) on rate rationalisation.

Under this new framework, most goods and services currently taxed at 12% are likely to be moved to the lower 5% slab. This would bring relief to consumers on a host of daily essentials. Similarly, a substantial number of items currently in the 28% bracket are expected to be shifted to the 18% slab, a move that could make big-ticket items like consumer electronics and certain vehicles more affordable.

Potential Winners: Consumer Goods, Automobiles, and More

The proposed rate cuts could have a significant impact on several key sectors.

• Fast-Moving Consumer Goods (FMCG): Everyday household items such as toothpaste, shampoo, soaps, and packaged foods like butter and cheese, which currently attract 12% or 18% GST, are prime candidates for a move to the 5% slab. This would directly reduce the tax burden on the common consumer and is expected to stimulate demand. Companies like Hindustan Unilever, Godrej Consumer, and Nestle India are likely to be major beneficiaries.
• Automobiles: The auto sector is a major focus of the reforms. Small petrol cars with engine capacities up to 1,200 cc and entry-level two-wheelers are likely to see their GST rates drop from 28% to 18%. The Council is also expected to debate a long-standing demand to reduce the tax on two-wheelers. Furthermore, the GST on electric vehicles (EVs) is a point of discussion, with the Centre pushing for a 5% rate to accelerate adoption, even as some proposals suggest an 18% rate for higher-priced EVs.
• Consumer Durables: “White goods” such as air conditioners, refrigerators, and washing machines, which currently fall under the highest 28% slab, are widely expected to be taxed at 18%. This could lead to a significant price drop for these items, potentially boosting sales ahead of the festive season.
• Cement: The construction sector is also on the agenda, with a potential rate cut on cement from 28% to 18%. This could provide a boost to infrastructure and housing projects.

The “Sin” and Luxury Tax: A New 40% Slab

To offset the potential revenue loss from the rate cuts, the Council is considering a new, higher 40% tax slab for “sin” and ultra-luxury goods. Items in this category would include tobacco products, pan masala, and high-end automobiles. This move is designed to maintain revenue neutrality while providing relief on essential and semi-essential items.

Addressing States’ Concerns and Fiscal Implications

A major point of contention and a key factor in the deliberations is the potential revenue loss for states. Several opposition-ruled states have expressed concerns that the proposed rationalisation could result in a significant drop in their GST revenues, estimating losses of up to ₹2 lakh crore. These states are demanding a clear compensation mechanism to protect their fiscal interests.

However, a report from SBI Research suggests that states may, in fact, be “net gainers” in the long run. The report argues that while there might be a temporary dip, the increased consumption and simplification of the tax system will lead to higher revenue buoyancy over time. The Centre is also expected to propose ways to utilise the existing compensation cess surplus to bridge any immediate shortfalls.

Beyond Rates: A Push for Simplification

In addition to rate rationalisation, the meeting’s agenda includes measures to enhance the “ease of doing business.” Discussions are expected on simplifying compliance, with proposals for pre-filled tax returns, automated refunds, and a more streamlined registration process. The Council is also likely to address the issue of an “inverted duty structure,” where tax on inputs is higher than on the final product, a long-standing problem that has created cash flow issues for many businesses.

The decisions taken at this GST Council meeting are poised to be one of the most significant overhauls of the tax regime since its inception. If a consensus is reached, the reforms could be rolled out ahead of the festive season, providing a much-needed stimulus to the economy and tangible price relief to consumers across the country.