GST shake up: Centre plans 2 GST slabs — 5% and 18%, 40% special rate only for 7 goods

The Goods and Services Tax Council is likely to meet in September or October to discuss the next generation of reforms in the indirect tax levy, which includes the Centre’s proposal to rationalise rates and have two main rates of 5% and 18% along with a 40% rate on sin goods such as tobacco and pan masala.

The Centre’s blueprint for the overhaul of GST, which has completed eight years, also includes correcting the tax structure, including addressing inverted duty problems, resolving classification issues, as well as reforms to ensure faster registration of businesses within three days in 95% of cases, and quicker refunds.  
If approved by the GST Council, the revamped tax regime could take effect from the early part of the third quarter of the fiscal year.

Slab proposals

The Centre has sent its proposal on the two-rate structure to the Group of Ministers under the GST Council on rate rationalisation. The plan is to have two main rates of GST of 5% and 12% while doing away with the rates of 18% and 28%. The compensation cess is also set to come to an end, and it would be replaced with a rate of 40% that would be levied on a reduced number of items totalling five to seven sin goods, including tobacco and pan masala.

According to the source, 99% of the goods currently taxed at 12% will move to the 5% tax slab, while almost 90% of the items currently in the 28% slab will be transferred to the 18% slab. While sources did not divulge  item-wise changes, they elaborated that aspirational goods of use by the middle class, as well as white goods such as TVs and refrigerators, are proposed to be taxed at the 18% rate from the current 28% levy.  “The common use and daily use items will be in the 5% GST rate,” they further said.

The current exemptions and nil rate of GST on specified items will also continue, as would the marginal rates on specified items such as bullion and jewellery, and export and employment intensive sectors.

Sources explained that as of now, 67% of the total revenue comes from the 18% tax slab, while 5% of the revenue comes from the 12% rate and 7% of the revenue comes from the 5% slab.

Lower GST rates on common use and essential items are also expected to give a leg up to consumption and revenue, and help boost GDP growth, even though there could be some short-term impact on tax collections.

Boost to consumption and economy

Prime Minister Narendra Modi, in his Independence Day speech, announced the introduction of next-generation GST reforms by this Diwali, aimed at reducing taxes on daily-use items. The Centre is expected to discuss the proposals with states in the coming weeks to try and build a consensus on these.

“The idea is to move away from the inherited and legacy logic of GST to a new system of GST which is friendly for the common man with low tax rates and gives a boost to the economy and invigorate sectors such as agriculture, textiles, fertilisers, renewable energy, automotives, handicrafts health and insurance by providing lower tax rates, resolving GST classification disputes and correcting the inverted duty structure,” said an official source.

Legislative amendments to the GST Act are not required to implement these proposals, which would mean that if approved by the GST Council, they can be implemented through notifications.

Sources said that given the comprehensive nature of the proposals, multiple meetings of the GST Council could also be called to discuss and approve them over the coming months.

Faster refunds and registrations, pre-filled tax returns

Apart from tax changes, the Centre has also proposed structural reforms in GST, including correction of the inverted duty structure that would in particular, help sectors like textiles and fertilisers. The government has also proposed streamlining rate structures by placing similar goods in the same tax slab to do away with classification disputes and litigation on items such as namkeens and savouries.

Meanwhile, to promote stability and predictability of the indirect tax framework, it has recommended seamless technology-driven registrations and faster refunds along with automated refunds for exporters and those with inverted duty structures. It has also proposed implementing pre-filled returns to cut down on invoice mismatching and lowering the compliance burden.