In view of the impending report by the Group of Ministers on GST rate rationalisation, and the ongoing discussions in media and other forums, expectations for a reduction in GST burden on the common man have been high for some time. Amid concerns over a potential dip in GDP due to steep import tariffs imposed by President Trump, many believed that boosting domestic consumption could help offset the impact. However, few anticipated that GST reforms would arrive this soon—and with such transformational potential.Surprisingly, the Prime Minister made an unexpected announcement on GST reforms during his Independence Day address from the Red Fort. This move has settled speculation over both the scale and timing of the reforms. Calling it the “next generation of reforms,” the PM assured that the changes would lower the burden on the common man and described them as a Diwali gift. This makes it clear that significant GST rate cuts—especially on goods of mass consumption—are on the horizon and likely to roll out before Diwali.The Group of Ministers has already endorsed a two-slab GST regime and submitted its proposal to the GST Council. The proposed structure includes two main rates: 5% and 18%. Goods currently taxed at 28% would be moved to 18%, and those under the 12% slab would be shifted to 5% or even zero. The 40% ceiling rate would be reserved for select demerit or luxury goods. The standard rate on services is expected to remain at 18%, while tobacco products would continue to be taxed heavily, possibly via a cess or a new levy.
Unlike the incremental or ad hoc changes made in the past, these reforms are sweeping and are expected to significantly impact both taxpayers and consumers in terms of compliance, tax incidence, and pricing. As a Diwali gift, the reforms are aimed at delivering visible price reductions on mass-consumption goods, thereby encouraging spending and driving long-term economic growth. However, this is a calculated risk by the government, as it will initially result in revenue losses for both the Centre and States.This isn’t the first time tax reductions have been used to spur consumption. In December 2008, less than three months before the Union Budget, the UPA government slashed central excise duty by 4%, from 14% to 10%, causing a projected revenue loss of ₹20,000 crore in just four months. While the revenue took a hit in 2009-10, it was partially restored in the following years through rollbacks.In July 2018, under interim Finance Minister Piyush Goyal, GST rates were reduced on a few consumer goods following approval by the GST Council. While there was a marginal dip in revenue for 2-3 months, overall collections remained stable, as the GST system was still in a stabilisation phase.
The current reform, however, is more far-reaching. It proposes large-scale rate cuts across many goods, abolishing the 12% and 28% slabs entirely. This will likely cause a substantial and more prolonged revenue dip. But with GST collections currently strong, the government seems confident this is the right time. Moreover, the anticipated GDP decline due to Trump-era tariffs—estimated by some at 0.4%—may be offset by the expected consumption boost.The expected rate cuts will benefit a wide range of goods: white goods, entry-level automobiles, cement, groceries, and other essentials. However, placing mass-consumption goods under the 5% slab could significantly affect revenue, especially where input tax credit (ITC) is not reduced proportionally. The practice of applying 5% GST without ITC should be avoided, as it disrupts the credit chain and leads to higher end-consumer prices.The government has pledged relief for the common man, middle class, farmers, and MSMEs. But targeting benefits through GST is complex, as few goods or services are used exclusively by these groups. A practical (though imperfect) solution may be to base GST rates on maximum retail price (MRP), especially for textiles, footwear, food, and automobiles. Still, this approach brings its own complications.The impact of rate rationalisation will vary across states, depending on their consumption and production patterns. States with larger lower-income populations may see a sharper drop in revenue. This could lead to demands for compensation at the GST Council—West Bengal has already voiced concerns.While the aim is to lower prices and boost consumption, the full benefits can only be realised if tax reductions are passed on to consumers. However, the Anti-Profiteering Authority under GST has been rendered inoperative from April 1, 2025, and can no longer determine whether suppliers have passed on the benefits. Since this provision had largely outlived its utility, its removal is justified. The government is unlikely to revive it, especially amid reports of inventory pileups and sluggish demand causing distress sales.On the positive side, the new rate structure could reduce classification disputes and litigation, saving time and costs for both businesses and the government. For businesses, however, adapting to the changes will require updates to internal systems and compliance processes. Price adjustments may also take time, given the inventory already in the supply chain.The government has also announced structural reforms in the GST regime, part of an ongoing process. Prefilled returns will ease compliance. However, one problematic provision—that requires input recipients to reverse ITC if the supplier hasn’t paid GST—should be scrapped, as it penalises the wrong party. Additionally, fake invoices remain a concern, and other procedural irritants need to be addressed.—The author, O.P. Dadhich is Former Member, Central Board of Indirect Taxes & Customs. The views are personal.
Source link
