GST Council Begins Overhaul of Tax Rates to Enhance Domestic Spending and Revenue Protection

The government initiated efforts to revamp the complex goods and services tax (GST) system on Wednesday. The aim is to reduce taxes on everyday items like butter, footwear, and apparel to boost domestic spending. This move is also intended to mitigate the economic impact of US tariffs. The 56th GST Council meeting, led by Union Finance Minister Nirmala Sitharaman, discussed these changes over two days.

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The council is considering a simplified GST structure, moving from four slabs—5%, 12%, 18%, and 28%—to two main rates of 5% and 18%. A special 40% slab is proposed for luxury items like high-end cars and tobacco. Decisions from the meeting are expected to be announced on Thursday. The panel also reviewed easing compliance rules for businesses, including a three-way registration process for non-risky businesses and faster refunds for exports.

Proposed Tax Reductions on Common Goods

Common-use food items such as butter, ghee, dry nuts, and beverages might see a tax reduction from 18% to 5%. Unpacked daily use food items will continue to have no tax. The GST Council is likely to have approved lowering the GST rate on footwear and apparel priced up to Rs 2,500 to 5%. Currently, items priced up to Rs 1,000 are taxed at this rate.

Consumer goods like tooth powder, feeding bottles, tableware, kitchenware, umbrellas, utensils, bicycles, bamboo furniture, and combs may see their tax rate drop from 12% to 5%. Similarly, personal care products such as shampoo, talcum powder, toothpaste, toothbrushes, face powder, soap, and hair oil could also see a reduction from 18% to 5%.

Impact on Vehicles and Electronics

The council is discussing reducing GST on petrol, LPG, and CNG vehicles under certain specifications from 28% to 18%. Diesel vehicles with specific features are also part of this discussion. Motorcycles up to 350 cc and consumer electronics like ACs, dishwashers, and TVs might see their tax rates lowered from the current 28% to 18%.

However, readymade garments and footwear priced above Rs 2,500 may become more expensive as their tax rate could rise from 12% to 18%. Discussions are ongoing about taxing larger petrol and diesel automobiles at a higher rate of 40%, along with motorcycles above 350 cc and luxury items like yachts and aircraft for personal use.

Economic Implications of GST Reforms

The simplification of the tax regime was initially announced by Prime Minister Narendra Modi during his Independence Day speech. This reform comes as India's exports face a significant tariff from the US. Economists predict that these GST reforms could boost India's economy by up to 0.5 percentage points within two years of implementation. This increase could offset the impact of US tariffs.

India's economy heavily relies on consumption; last fiscal year saw private sector spending account for 61.4% of nominal GDP. Opposition-ruled states have demanded compensation for revenue losses due to the GST changes. Andhra Pradesh's finance minister expressed support for the Centre's proposals.

State-Level Concerns

Before the Council meeting on Wednesday morning, eight opposition-ruled states met separately. They reaffirmed their demand for revenue protection before agreeing to any rate changes. Jharkhand Finance Minister Radha Krishna Kishore stated that his state would lose Rs 2,000 crore if the reforms proceed without compensation.

Kishore said they would support the agenda if compensated for losses: "If the Centre agrees to compensate us for whatever loss we would incur, then we have no issues in approving the agenda before the Council." He added that it is the Centre's responsibility in a federal structure to compensate states for revenue loss.

With inputs from PTI