Govt mulls cutting GST slabs from four to two to ease tax burden

Following Prime Minister Narendra Modi’s announcement of major overhaul in Goods and Services Tax system, the Union Government has proposed to reduce tax slabs to simplify tax structure, reduce tax burden and enhance affordability of Indian consumers. The double “Diwali Gift”, as PM Modi dubbed it, will reduce GST slabs from four (0 per cent, 5 per cent, 12 per cent, 18 per cent and 28 per cent) to two. The next generation reforms aim to reduce taxes on everyday items, streamline the tax system and foster economic growth before the festive season.

According to sources, the government proposed two slabs of 5 per cent and 18 per cent, with a special 40 per cent rate for goods like tobacco and online gaming. Notably, the government is considering to eliminate the 12 per cent slab, redistributing most of its items to the 5 per cent category to make essentials like ghee, soaps, snacks and small FMCG sachets cheaper. Approximately 90 per cent of goods currently taxed at 28 per cent are proposed to shift to the 18 per cent slab, enhancing affordability for items such as refrigerators, air conditioners and packaged food.

The reduce tax slabs will lower the operational cost of micro small and medium enterprises. The GST Council is scheduled to meet in September and would take final decision on the expected reforms. The GST Council is responsible for overseeing and administering the Goods and Services Tax, a unified indirect tax system introduced in July 2017, to replace multiple central and state taxes.

In his speech on August 15, PM Modi highlighted the success of the GST regime since its introduction in 2017, noting that it has streamlined India’s tax system by merging multiple indirect taxes. “Over the past eight years, we have undertaken a major reform in GST and reduced the tax burden across the country. Now, the time has come for a review. After consultations with states and a high-powered committee, we are set to introduce next-generation GST reforms by Diwali,” Modi said.

The Finance Ministry said it has submitted a detailed proposal to the Group of Ministers constituted by the GST Council. The reforms are focussed on three pillars — structural reforms, rate rationalisation and ease of living.

“This Diwali, taxes on items used by the common man will be reduced substantially. Our MSMEs will benefit hugely, and daily-use items will become cheaper, strengthening our economy,” Modi said, underscoring the reforms’ focus on middle-class households and micro, small and medium enterprises (MSMEs). The reforms also aim to address longstanding issues like inverted duty structures, simplify compliance and expedite refunds through technology-driven processes, benefiting exporters and manufacturers.

Meanwhile, the Congress on Saturday demanded that GST 2.0 should be truly a “Good and Simple Tax in letter, spirit and compliance — not like the Growth Suppressing Tax it has become”. For this, the grand old party demanded an official discussion paper on GST 2.0 to hold an informed and wider debate on this vital and pressing national issue.

Congress general secretary Jairam Ramesh said the spirit of GST has been vitiated by an increased number of rates and the granting of multiple exemptions over the last seven years.

“The structure also seems to have facilitated evasion. There must be a drastic reduction in the number of rates. Simplification of the rate structure is essential but must be done in a manner that minimises revenue uncertainty to states and also eliminates the classification disputes that have become so common,” he said.

The Congress leader also advocated for the extension of GST compensation cess, which expires on March 31, 2026, to offset any revenue uncertainty from the rationalisation of the rate structure.

“The widespread concerns of MSMEs — the major employment generators in the economy — must be addressed meaningfully. …In addition, states should be incentivised to move towards the introduction of state-level GST to cover electricity, alcohol, petroleum and real estate as well,” Ramesh said.

India