The Indian government is reportedly considering a major overhaul of the Goods and Services Tax (GST) structure, potentially streamlining it into two primary tax slabs: 5% and 18%. This proposal includes a special rate of 40% for luxury and "sin" goods.

Key Proposed Changes:

• Two-Slab Structure: The main feature of the revamp is the reduction of GST slabs to just two – 5% and 18%. This simplifies the existing multi-tiered structure.
• Shifting of Items: Approximately 90% of items currently in the 28% slab may be moved to the 18% slab. Furthermore, about 99% of items from the 12% slab could be shifted to the 5% slab.
• Special Rate for Sin Goods: A higher rate of 40% is likely to be applied to sin goods, which include items like tobacco, gutkha, and cigarettes. This category would be limited to a small number of items.
• Exclusions: Petroleum products are expected to remain outside the GST regime, even with the proposed changes.
• No Impact on Overall Tax Incidence: The total tax incidence is expected to remain at the current level of 88%.

Rationale and Expected Outcomes:

• Boost to Consumption: The GST revamp is expected to give a significant boost to consumption, which could offset any potential revenue loss from the rate rationalization.
• Relief for Common Goods: Common use items and daily-use products are likely to be taxed at the lower 5% rate.
• Simplification and Reduced Disputes: The reforms aim to simplify the GST system, reduce classification-related disputes, and enhance ease of doing business.
• Benefit to MSMEs: The proposed changes are expected to provide relief to micro, small, and medium enterprises (MSMEs).

Context and Implementation:

• PM Modi's Announcement: Prime Minister Narendra Modi announced that the next generation of GST reforms would be unveiled around Diwali, with the goal of providing substantial tax relief to the common person.
• GST Council Meeting: The GST Council is expected to hold a meeting in September to discuss these tax reforms. The council will deliberate on the recommendations of the Group of Ministers (GoM) on rate rationalization.
• Timeline for Implementation: The government aims to implement these changes within the current financial year so that the intended benefits can be realized quickly.
• Previous Discussions: The GST rate rationalization has been under discussion for several years.

Considerations and Challenges:

• Revenue Implications: Decisions involving rate reductions that could lead to revenue losses will need to be discussed thoroughly.
• State Government Concerns: Previous attempts to simplify or reduce rates on consumer-focused items have faced resistance from state governments.
• Compensation Cess: With the compensation cess regime ending on March 31, 2026, the GST Council will need to determine the tax rates for goods that currently attract this cess.

The proposed GST revamp signifies a move towards a simpler tax structure. The next GST Council meeting will be crucial in finalizing the details and paving the way for implementation.