The announcement made to bring about changes in the Goods and Services Tax (GST) is very important. The Prime Minister has rightly called this reform as 'Next Generation GST'. Under this process of further simplifying the Goods and Services Tax implemented in the year 2017, the 12 and 28 percent slabs will be removed from the existing four slabs of GST and only two slabs of 5 and 18 percent will remain. Due to this, items like butter, fruit juice, dry fruits which fall in the 12 percent category will come under the 5 percent category, while items like cement, AC, fridge, washing machine which fall in the 28 percent tax category will come under the 18 percent slab. The proposals of the Central Government to improve the Goods and Services Tax (GST) system are bold and timely. The government claims that these will benefit the middle class and the business community. Shifting 99 per cent of items in the 12 per cent slab to a 5 per cent tax rate and 90 per cent of items in the 28 per cent slab to an 18 per cent tax rate will substantially reduce the tax burden on most consumers. Rationalising the number of slabs and moving similar products into a single slab will also reduce ambiguity and litigation which are major problems for businesses in the current GST regime. Further, while most of the attention is focused on the rate restructuring proposals, procedural reforms relating to registration, filing of returns and refunds are equally important.
Simplifying GST involves not just reducing the number of rates, but also making the system more comprehensible and less time-consuming for taxpayers. Therefore, reforms such as simplifying registration, streamlining returns, and expediting refunds are positive steps being implemented by the Centre. These GST reforms, along with the new Income Tax Bill and the changes in income tax slabs in this year's budget, will mark 2025 as a significant year for tax reform. Lowering the tax on soap, oil, ready-made garments, and shoes from the current 12 percent to five percent will also offer relief to the general public. This could also lead to cheaper small cars. There has been a public demand to reduce the 18 percent tax on health insurance to five percent to provide relief to senior citizens and boost the insurance industry. The government might introduce this proposed change in the upcoming GST Council meeting in September. Eliminating two slabs is anticipated to result in a revenue loss of about Rs 4,000 crore, but this could be offset by increased consumption. Currently, all passenger vehicles are subject to a 28 percent GST along with a compensation cess ranging from 1 percent to 22 percent based on engine capacity, length, and body type, bringing the total tax payable to as much as 50 percent. Electric cars are taxed at 5 percent, with no compensation cess. GST on two-wheelers is 28 percent. There is no compensation cess on models with engine capacity up to 350 cc and 3 percent on models with engine capacity above 350 cc.
The revised GST structure is expected to eliminate tax rates of 12 per cent and 28 per cent, benefiting ordinary cars and two-wheelers. However, some demerit items, such as luxury cars, may be taxed at 40 per cent.
Prime Minister Narendra Modi has announced that citizens will get a double benefit this Diwali through a planned GST reform aimed at reducing the prices of goods and services for the poor and the middle class. The government is confident that increased consumption and widening of the tax base will compensate for most of the revenue loss. With a large number of goods taxed at only 5 per cent, the incentive for input tax credit scams and tax evasion will also be largely eliminated. The tax collection target through GST has been met and GST collection has doubled in the last five years. It would not be surprising if this is also one of the reasons for the government to reduce taxes. This reform in GST will simplify the tax system, reduce tax rates, provide relief to businessmen and consumers and strengthen the economy.
It is suggested that over time, this model will transition to a unified tax rate, or a single tax bracket, by 2047. In the short term, it is also seen as a strategy to compete with US tariffs, potentially mitigating tariff threats. Experts suggest that this reform will lower the cost of goods, boosting consumer demand and fostering consumption-driven growth, thereby enhancing India's GDP growth. However, concerns among states regarding GST have intensified. Following the new system's implementation, states fear an annual revenue loss of approximately Rs 7,000 to Rs 9,000 crore. States argue that their financial conditions are already strained due to limited income sources, and any loss could impact social development programs and administrative expenses.