Introduction
The GST rate rationalisation exercise is set to bring significant changes to India’s tax structure, aiming to ease the burden on consumers while ensuring revenue neutrality. Recent reports indicate that the government is unlikely to introduce a 35% GST slab for specific goods like tobacco and aerated beverages, as initially proposed by the Group of Ministers (GoM). Instead, a focus on reducing GST rates on essential items is gaining traction.
Key Highlights of the GST Rate Rationalisation Plan
1. No 35% GST Slab for Tobacco & Aerated Beverages
The GoM had suggested introducing a special 35% GST rate for tobacco and aerated drinks. However, the government has ruled this out, retaining the existing 28% GST plus a steep compensation cess. Currently, tobacco products attract additional cess rates ranging from 11% to 290%, making them among the highest-taxed goods under GST.
2. Luxury Taxation Based on Price Category Rejected
The GoM also proposed a tiered GST structure based on price points for luxury items, such as:
- Wristwatches above ₹25,000 – Proposed GST hike from 18% to 28%
- Shoes over ₹15,000 – Proposed GST hike from 18% to 28%
- High-end textiles priced over ₹1,500 – Proposed hike from 5% to 18%
However, the government has expressed concerns that such categorisation could lead to compliance complexities and litigation, ultimately rejecting the proposal.
3. Likely GST Reductions on Essential Items
The government aims to lower GST rates on commonly used items, ensuring affordability for consumers. Reports suggest that food items may see a shift towards the 5% GST slab, aligning with its broader intent to support household budgets.
4. GST Hikes for Select Non-Essential Items
While essential goods may see lower tax rates, some non-essential items could move to a higher GST slab. Products like hair dryers, curlers, and certain makeup kits, which currently attract 18% GST, might be moved back to the 28% category.
5. A Strategic, Phased Approach to Rate Cuts
Experts, including Saurabh Agarwal, Tax Partner at EY, recommend a gradual approach to GST recalibration rather than abrupt changes. He highlights:
- Possible GST cuts: Semi-essential goods from 18% to 12% and essential goods from 12% to 5%
- Focus on inverted duty structures: Correcting tax anomalies that impact businesses
- Long-term simplification: Streamlining slabs while ensuring revenue neutrality
The Revenue Neutrality Challenge
Finance Minister Nirmala Sitharaman has reiterated that GST rates will continue to decline. The revenue-neutral rate, which was 15.8% at GST’s launch, has already dropped to 11.4%. Balancing tax reductions while maintaining state revenues remains a key consideration in the rationalisation process.
What This Means for Businesses & Consumers
For Businesses:
- No new tax slab reduces compliance complexity
- Potential corrections in inverted duty structures may lower operational costs
- Possible higher GST rates on non-essential items
For Consumers:
- Lower GST on essentials means reduced household expenses
- Non-essential goods like luxury watches, premium shoes, and high-end textiles will retain current tax rates
- Some beauty and grooming products may become more expensive
Conclusion
The GST rate rationalisation plan is shaping up to be a pro-consumer initiative, focusing on reducing tax rates for essentials while maintaining revenue balance. With the upcoming GST Council meeting set to discuss these proposals, businesses and consumers should stay informed about the final decisions that will impact pricing structures and compliance requirements.