Simpler GST structure as govt pushes reform

Prime Minister Narendra Modi on Friday announced a major overhaul of the goods and services tax regime, hinting at lower rates on most items by Diwali, with people aware of the plans adding that most of the goods currently taxed at 12% could drop to 5% and most of those in the 28% bracket could shift to 18% under a proposed structure that will also have a 40% rate for what are considered sin or luxury goods.

- Rajeev Jayaswal

Speaking from the Red Fort ramparts on the 79th Independence Day, Modi said his government would implement “next-generation GST reforms” that would substantially reduce the tax burden across the country, particularly benefiting farmers, the middle class and small businesses. Since GST is a consumption tax, the ultimate beneficiary will be the consumer.

“This Diwali, I am going to make it a double Diwali for you. This Diwali, you fellow countrymen are going to get a very big gift,” Modi said, adding that after eight years of GST operations, “the need of the hour is that we should review it once.”

People aware of the matter in the government later detailed the proposal: a simplified two-slab structure replacing the current four-tier system that has operated since GST's launch on July 1, 2017 is being considered.

The reforms, according to these people, will make everyday essentials significantly more affordable — from groceries and medicines to televisions and washing machines. Agricultural equipment, bicycles, and even insurance and education services are set to become cheaper, delivering direct relief to households and farmers while boosting consumption across the economy.

Under the proposed framework, most goods and services would be taxed under two categories -5% and 18% rates-with a 40% "demerit" levy on items that currently attract the compensation cess. This will effectively whittle down the existing structure that includes of 5%, 12%, 18% and 28% brackets, along with a compensation cess for luxury and sin goods. As per law, the compensation cess will cease to exist after March 31, 2026.

The new 40% levy is being considered for the goods in the last category.

The people cited above added that "99% of items" currently in the 12% slab will move to the lower 5% bracket, and 90% of goods in the 28% category will shift to 18%.