New Delhi, India – In a significant move to simplify India’s indirect tax regime, a Group of Ministers (GoM) on Thursday gave its support, with some suggestions, to the central government’s proposal to rationalize the Goods and Services Tax (GST) structure. The recommendation, which aligns with Prime Minister Narendra Modi’s Independence Day announcement, now moves to the GST Council for final approval.
The GoM, chaired by Bihar Deputy Chief Minister Samrat Choudhary, has proposed that the existing four-rate structure of 5%, 12%, 18%, and 28% be streamlined into a two-slab system. If approved by the GST Council, only the 5% and 18% slabs will remain for most goods and services. A special 40% levy is also being considered for ultra-luxury and “sin” goods like tobacco products and certain luxury cars.
The reform is part of the government’s “next-gen” GST plan, which aims to simplify the tax system, reduce disputes, and provide relief to consumers, farmers, and small businesses. According to reports, the proposal would see 99% of items currently in the 12% bracket move to the lower 5% slab, while nearly 90% of goods and services in the 28% bracket would shift to the 18% slab.
States Raise Concerns Over Revenue Loss
While the GoM has endorsed the proposal, some states have raised concerns about the potential for revenue loss. West Bengal Finance Minister Chandrima Bhattacharya, a member of the GoM, stated that the group will send its report to the GST Council with “notings of our concern.” She told reporters, “We don’t know what is the revenue loss by this GST rate cut. They have not assessed yet. In the GST Council we will get to know.”
Uttar Pradesh Finance Minister Suresh Khanna echoed these concerns, noting that the Centre’s presentation did not specify the exact amount of revenue loss. He emphasized, however, that the main objective should be to ensure the “common people should benefit from this.”
The GST Council, which is headed by Union Finance Minister Nirmala Sitharaman and includes ministers from all states, will now consider the GoM’s recommendations. The council will need to address the states’ concerns about their share of revenue and the compensation mechanism for any potential shortfalls.
Additional Proposals and Fiscal Implications
In a separate but related meeting, a GoM also discussed the Centre’s proposal to exempt health and life insurance premiums for individuals from GST. While most states supported the idea, they stressed the need for a mechanism to ensure that the benefit of the tax cut is passed on directly to policyholders. This exemption could lead to an estimated annual revenue loss of about ₹9,700 crore.
Analysts have weighed in on the fiscal implications of the proposed GST changes. A UBS report estimates an annual revenue loss of around ₹1.1 trillion, or 0.3% of India’s GDP. However, the report suggests that this is a manageable cost that could be offset by a boost in consumption and higher-than-budgeted revenue from other sources.
The government aims to finalize and implement the new GST structure by Diwali, as announced by the Prime Minister. The final decision, however, rests with the GST Council, which will need to reach a consensus on these significant reforms.