Game Of Percentages: Early Diwali Gives GST Council Short Consensus Window

More critically, from the indirect taxation perspective, was the announcement of next-generation Goods and Services Tax (GST) reforms by Diwali to reduce taxes on daily essentials, benefiting the micro, small and medium enterprises (MSMEs), local vendors, and consumers, while simultaneously stimulating economic growth and creating a more efficient, citizen-friendly economy. 

He mentioned that a high-powered committee had been constituted to review, and that the states have also been consulted. Details of the same were provided by the Finance Ministry in a tweet almost immediately after the PM’s address.

Pillars Of New GST

The tweet mentioned that the Centre is proposing significant reforms in GST with a focus on three pillars — structural reforms, rationalisation of rates, and ease of living. 

Each of these pillars has sub-pillars, the most significant being the rate rationalisation. Talks of reducing taxes on items regularly used by the aam aadmi and on aspirational goods, as well as the belief that this would increase affordability and boost consumption, are on.

The second sub-pillar speaks of moving towards a simple tax with two slabs — standard and merit — with special rates only for select items. The third sub-pillar highlights the fact that with the end of the compensation cess (in March 2026), there will be greater flexibility to rationalise and align tax rates.

It is understood that the two slabs envisaged in GST were to be 5 per cent and 18 per cent, along with a 40 per cent rate for a small cohort of select goods — the so-called ‘sin’ products. Essential items such as food, medicines, education and daily-use goods would either attract nil or 5 per cent GST. 

What this will mean is that all the goods in the present 12 per cent slab will likely move into the 5 per cent slab. There is no mention of a change in special rates of 0.25 per cent for items like precious stones/diamonds and 3 per cent for gold and silver. 

Going by the PM’s address, it would appear that aspirational items like TVs, refrigerators, and washing machines will be bunched under the 18 per cent bracket, down from the present 28 per cent. 

Thus, it is estimated that 99 per cent of the items in the 12 per cent slab will move to 5 per cent, similarly, 90 per cent of the items in the 28 per cent slab will move to 18 per cent.

Revenue Dent?

Obviously, this reduction will have revenue implications. The 18 per cent slab currently is the biggest money spinner, with 65 per cent of the government’s revenue coming from this slab. 

The remaining revenue comes from the other slabs — 11 per cent from the 28 per cent slab, 5 per cent from the 12 per cent slab, and 7 per cent from the 5 per cent. The Centre must have done its calculations, as it is amply clear that the belief is that the change in the tax structure will spur demand and consumption, which in turn will compensate for the dip in revenue caused by the reduction in rates and slabs.

Unlike the normal process of a recommendation coming from the Group of Ministers (GoM) and being considered by the GST Council, this proposal has been mooted by the Centre. This is also unusual because three Groups of Ministers (GoMs), consisting of representatives from the Opposition parties, which have been tasked to look into these aspects, are already in session. 

The GoMs on revenue analysis, rate rationalisation, and compensation cess are currently grappling with these issues. There is always a greater chance that GoM recommendations will be easily accepted since they are represented by all parties. 

With the PM indicating that Diwali will see these dhamaka reforms, the GoMs and thereafter, the GST Council, have a very short window (Diwali this year is likely to be on October 21) to deliberate and reach a consensus. 

Centre Bullish On Growth

Both the Reserve Bank of India and S&P have pegged India’s growth rate at 6.5 per cent. It is clear that the Centre has stuck to the projected growth rate (which is by far the highest for any major economy), while prescribing the reduction in GST rates, and that the exercise will not result in any major loss of revenue. 

However, the states will need more concrete assurances. They will be concerned about the revenue impact of the proposals, more so since the compensation cess will cease after March 2026. 

A lot of number crunching will need to be done to assuage their concerns — and a lot of assumptions will be built into the calculations. The other uncertainty will be the impact of the US tariffs on India’s labour-intensive export sectors.

The fact remains that GST has always faced criticism regarding its multiple taxation slabs. Therefore, the present proposal is a welcome step and is in the right direction. The next GST council meetings are expected in September and will establish the way forward for GST.

(The writer is the retired Chairman of the Central Board of Indirect Taxes & Customs. Views are personal)