India is on the cusp of its most significant Goods and Services Tax (GST) overhaul since its implementation eight years ago, with changes targeting the cost of living for the common person, while also raising concerns about potential revenue shortfalls for states.

The GST Council, chaired by Union Finance Minister Nirmala Sitharaman and comprising ministers from all states, is currently holding its 56th meeting in New Delhi to discuss these proposed "next-gen" GST reforms. Prime Minister Narendra Modi has emphasized that these reforms aim to provide relief to the common person, farmers, the middle class, and MSMEs. The changes are expected to be unveiled around Diwali in October 2025.

Key Proposed Changes:

• Simplified Tax Structure: The current four-tier GST structure of 5%, 12%, 18%, and 28% is likely to be replaced with a simplified two-rate system of 5% and 18%.
• Rate Adjustments: Goods currently taxed at 12% would move to the 5% bracket, and approximately 90% of goods under the 28% rate would shift to 18%. Essential items such as toothpaste, shampoo, talcum powder and soaps are likely to be in the 5% bracket, reduced from 18%.
• New "Sin Tax": A new 40% GST rate may be applied to a select list of demerit goods, including tobacco, pan masala, and luxury items like high-end cars.
• Exemptions: The 0% GST rate will continue to apply to most essential goods, such as food, medicine, and education-related products. Health and life insurance premiums may also see a reduction from 18% to 5% or even nil.
• Focus on Compliance: The reforms also aim to ease compliance with pre-filled GST returns, faster refunds, and smoother MSME registrations.

Potential Benefits:

• Reduced Tax Burden: The restructuring aims to lower costs for essential goods, boost consumption, and enhance industry competitiveness.
• Increased Disposable Income: Lower taxes on daily essentials and other goods are expected to increase disposable income, particularly in rural and semi-urban areas.
• Simplified Compliance: Fewer tax slabs and streamlined processes should make compliance easier for businesses, reducing disputes and litigation.
• Boost to Key Sectors: Sectors like FMCG and automobiles are expected to benefit from the changes, with potential sales growth.

Revenue Concerns:

• Potential Losses: Opposition-ruled states are seeking compensation for any revenue loss that may occur due to the rejig. States project a potential revenue loss of between Rs 85,000 crore and Rs 2 lakh crore a year.
• Compensation Cess: Discussions are ongoing regarding the future of the compensation cess, which is currently extended till March 2026.
• Balancing Act: The government hopes that gains from higher compliance and increased consumption will offset the losses from lower tax rates. The 40% slab on sin/luxury items also aims to offset losses from lower slabs.

Overall, the GST overhaul represents a significant step towards simplifying India's tax structure, reducing the burden on consumers, and boosting economic growth. However, the potential for revenue shortfalls remains a concern, and the GST Council will need to carefully consider the impact of these changes on both consumers and states.