A Group of Ministers (GoM) has approved in principle the Union government's proposal to reduce the number of Goods and Services Tax (GST) brackets from four to two. The move, aimed at reducing the tax burden on consumers and streamlining compliance, is being seen as a potential precursor to "GST 2.0."
The Proposal: Two Main Slabs, One Special Rate
The Centre's plan seeks to eliminate the existing 12% and 28% slabs, retaining 5% and 18% as the main rates, while introducing a 40% slab for luxury and sin goods. This structural reform, officials said, will make the tax system easier to understand and implement, while boosting consumption.
Bihar Deputy Chief Minister and GoM chairperson Samrat Choudhary confirmed the development, stating, "GoM has decided to accept the two proposals of the Centre." However, he added that members flagged concerns which will be further deliberated upon in the GST Council.
Concerns Over Revenue Loss
While most states are in favour of the rate rationalisation, many have raised apprehensions about revenue loss. According to an SBI research report, the reform could lead to an annual revenue shortfall of Rs 85,000 crore and around Rs 45,000 crore in FY25.
The majority of GST revenue currently comes from goods taxed at 18%, followed by those in the 28% bracket. The Centre, however, believes that higher demand from reduced tax rates could offset much of the revenue loss.
Diverging State Views
Uttar Pradesh Finance Minister Suresh Kumar Khanna supported the reform, calling it "in the interest of the common man", while emphasizing the need for a careful assessment of its fiscal impact.
West Bengal Finance Minister Chandrima Bhattacharya also endorsed the proposal as "pro-people", but stressed that states must be compensated for any potential losses. "If a state suffers revenue loss, it ultimately affects the common man," she said.
Industry and Expert Take
Tax experts welcomed the reform, saying it would reduce classification disputes, simplify compliance and encourage consumption. One expert described it as GST 2.0, urging businesses to prepare for a swift transition: "More than 70% of GST collections come from the 18% slab, which remains untouched. The impact of cuts may be limited, especially as reduced prices could boost demand."
Next Steps
The GoM's recommendations are not binding and will be taken up by the GST Council, the apex decision-making body on indirect taxation. The Council will weigh the benefits of a simplified tax structure against the revenue implications for states, before giving its final approval.
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