NEWS – GOM BACKS GST RATE OVERHAUL — 12% & 28% SLABS TO GO

HIGHLIGHTS

What’s Proposed

• Scrap 12% & 28% slabs and merge them with 5% and 18% respectively.
• Coverage shift: ~99% of items at 12% → 5%; ~90% of items at 28% → 18%.
• New top slab: 40% for luxury & sin goods (e.g., tobacco, aerated drinks, luxury cars).
• Some members suggested an additional levy/cess over 40% to keep current tax incidence roughly unchanged.

Who Decided & What’s Next

• Decision taken by the GoM on GST rate rationalisation, chaired by Bihar Dy CM Samrat Choudhary.
• The Other members are: Chandrima Bhattacharya (West Bengal Finance Minister), Krishna Byre Gowda (Karnataka Revenue Minister), K N Balagopal (Kerala Finance Minister), Suresh Kumar Khanna (UP Finance Minister), and Gajendra Singh (Rajasthan Health Minister).
• Recommendations will go to the GST Council (chaired by the Union Finance Minister) for a final call, likely in September.
• States flagged revenue worries and asked for continued compensation; Council to deliberate.

Rationale & Expected Gains

• Simplification: Fewer slabs → easier compliance and administration.
• Consumer relief: Many commonly used goods/services would move to lower rates, turning cheaper.
• Demand push: Lower prices could spur consumption, softening revenue impact.

Fiscal Impact

• Limited headline hit: About 70% of GST collections currently arise from the 18% slab, which stays unchanged.
• Net effect could be neutral-to-mild due to demand uplift and targeted higher rate on luxury/sin goods.

Sectoral Implications: Housing

• Affordable & mid-segment housing: Potential 2–4% price easing if input tax credit (ITC) is restored and input costs fall.
• Affordable housing rate (1%) largely unchanged; benefits mainly via lower inputs/ITC rather than headline rate cuts.

Expert Views (Essence)

• Positive for consumption: Could strengthen a consumption-led economy.
• Caveat: Must fix inverted duty structures or firms face working capital strain, blunting pass-through to consumers.
• Need clarity: Industry seeks guidelines on benefit pass-through and transition rules.

Risks & Open Issues

• State revenues/compensation mechanism post-reform.
• Design of 40% slab and any additional levy/cess to preserve current incidence on sin/luxury goods.
• Transition management: Avoiding disputes, ensuring ITC continuity, and preventing rate-arbitrage.

Prelims Pointers

• Slabs to be scrapped: 12%, 28%
• Proposed top slab: 40% (luxury/sin goods)
• Body for final decision: GST Council
• Key bottleneck: Inverted duty structure and state revenue concerns.