Opinion Welcome GST 2.0

Just a few weeks after Prime Minister Narendra Modi spoke about ushering in the next generation of GST reforms in his Independence-Day speech at the Red Fort, the GST Council, in its 56th meeting, has moved towards restructuring the indirect tax regime. The current structure, characterised by a multiplicity of rates, will give way to a broad two-slab structure of 5 per cent and 18 per cent, and a special de-merit rate of 40 per cent for sin and luxury goods. Reducing the number of slabs is a welcome step as it will help reduce the complexity of the tax system, shrink spaces for discretion and bring down classification issues. Lowering the tax rates will make goods and services more affordable, providing a fillip to demand. This boost to consumption comes at a time of acute uncertainty on the external front with the imposition of 50 per cent tariffs by US President Donald Trump. Concerns over the possibility of household consumption being deferred until clarity over the new tax rates emerges have been addressed with the Council recommending that the new rates will be effective from September 22. This reduction in the indirect tax rates follows cuts in personal income taxes announced in the Union Budget 2025-26.

The GST rates have been slashed across a plethora of goods and services. For instance, items of daily consumption such as hair oil, shampoo, toothpaste etc will now be taxed at 5 per cent, down from 18 per cent. White goods such as air conditioners and television sets will also be taxed at 18 per cent, down from 28 per cent. The tax incidence has also been lowered for cars and two-wheelers (up to 350 cc engine). The rate rationalisation exercise has also addressed some of the more contentious items such as insurance and cement — while cement will now be taxed at 18 per cent, down from 28 per cent, life and health insurance policies are now exempt. Steps have been taken to correct the inverted duty structure in segments such as manmade textiles and fertilisers. Alongside, the Council has also taken steps to ease the compliance burden, such as simplifying the registration scheme for small firms.

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Bringing down the tax rates will lower the weighted averaged GST rate. The tax rate had already fallen to 11.6 per cent by September 2019, from 14.4 per cent in 2017 — well below the 15.3 per cent revenue neutral rate recommended by the Subramanian committee. Thus, the revenue stream for both the Centre and states will be impacted, though there are expectations of the rate rationalisation exercise translating to higher consumption and improved compliance. As reported in this paper, the government has estimated the net revenue implication to be around Rs 48,000 crore (on the base of 2023-24). Greater clarity will emerge in the coming months.