EDITORIAL
Hopefully, GST reforms will bring relief to consumers and small businesses
The news buzz doing the rounds tells us that GST reforms are around the corner. Dubbed GST 2.0 or ‘next-generation GST’, the changes promise to bring in a simplified rate structure, eliminate compensation cess, offer tax relief on specific items, and provide greater compliance ease via digital tools. The Goods and Services Tax itself was brought in on July 1, 2017, amidst much enthusiasm, in a midnight session. It was seen as the country’s largest indirect tax reform, aimed at creating a uniform market. Today, though, it is apparent that the technology-driven initiative in India came with some gain and some pain.
It is anticipated that GST will, in the near future, have just two main slabs. Instead of the existing four-tier structure (5%, 12%, 18%, and 28%), India expects to see this replaced by just 5% (lower/essential goods) and 18% (general goods/services). It has been hinted that 99% of goods currently taxed at 12% are expected to move to the 5% bracket, and around 90% of items in the 28% slab will shift to 18%. At the same time, a category of “sin and luxury goods” could face a new 40% proposed GST rate. This would include items such as tobacco, pan masala, and high-end vehicles.
The GST compensation cess, which has been charging additional taxes to support state revenues, is likely to be phased out or replaced, particularly after its extended timeline ends in March 2026. The business press has reported that a health-focused cess may be introduced for “sin goods” as an alternative mechanism. Small cars (sub-1,200 cc petrol or sub-1,500 cc diesel, and length under 4 m) may drop from 28% to 18%. Health and life insurance premia might see reduced rates or even be exempted. Using a track-and-trace system, a new provision under the law could require unique identification markings on certain goods to aid traceability.
So far, GST has run into some misgivings for having too many slabs and too much complexity. India’s four-slab GST created confusion for businesses and disputes about classification. It also placed a high burden on common sectors. Insurance, small cars, printing (including books), and many essentials faced rates of 12–28%, which felt excessive and even discouraged consumption. Since the end of the GST compensation period (June 2022, later extended via cess to 2026), states have worried about revenue losses. There were gaps and distortions—like higher taxes on inputs than on final goods. MSMEs, traders, and startups have also found GST filing and disputes burdensome.
Globally, successful VAT/GST systems use just one or two main rates. India’s multi-slab model was an exception. But it is never too late to course-correct; slowing consumption and pressure on investment need action. This could also address the long-standing concern that GST benefitted the Centre at the cost of state fiscal autonomy. The proposed changes look good.Hopefully, they will do away with some bizarre or contradictory GST slabs too—like charging biscuits at 12% but cakes at 18%; packaged curd or lassi at 5% but no tax on the unpackaged. Charging significantly high taxes on hair oil, soap, small and hybrid cars makes no sense either. The GST Council is having a crucial meeting on September 3 and 4, where they will deliberate on the agenda focused on bringing down tax levies on a variety of goods and services. Hopefully, officialdom and our policy planners will consider such issues from the viewpoint of the taxpayer and consumer, who primarily feel the pinch.
