GST Reform on Track: GoM Backs Two-Slab Structure to Simplify India’s Tax System

The Group of Ministers (GoM) on Goods and Services Tax (GST) has approved the Centre’s ambitious proposal to overhaul India’s current four-tier GST system into a simplified two-slab structure. Under the new arrangement, the 12% and 28% slabs will be scrapped, leaving 5% for essential goods and 18% for standard goods, while luxury and sin items will continue to attract a 40% levy.

The proposal, described as the first big step toward “GST 2.0,” will now be sent to the GST Council for final approval. If cleared, it will mark one of the most significant tax reforms since GST was introduced in 2017.

Goods and Services Tax (GST).Image Source : India TV News

What Changes Under the New System?

The decision to collapse multiple slabs into just two aims to simplify compliance for businesses and reduce confusion among consumers. Nearly 99% of items currently taxed at 12% are expected to move to 5%, making a range of daily-use products cheaper. Similarly, around 90% of goods now taxed at 28% will move to 18%, offering relief to sectors such as automobiles, cement, consumer durables, and household appliances.

For luxury items like high-end cars, tobacco, and pan masala, the higher 40% sin tax will remain intact, ensuring that government revenues are not compromised while discouraging excessive consumption of demerit goods.

Relief for Consumers and Businesses

Finance Minister Nirmala Sitharaman stressed that the reform has been designed to benefit households, farmers, small businesses, and the middle class. Lower tax rates on essential items are expected to ease inflationary pressures, while industries such as FMCG, automobiles, and cement anticipate a surge in demand due to lower costs.

The stock market has already reacted positively. In the days following Prime Minister Narendra Modi’s Independence Day announcement on tax rationalisation, the auto index rose by nearly 5%, with companies such as Maruti Suzuki and Hyundai recording significant gains. FMCG giants like Hindustan Unilever, Nestlé India, and Dabur also saw sharp rallies, reflecting optimism that cheaper goods will boost consumer spending.

Concerns Over Revenue Loss

While most states have welcomed the move, some, including West Bengal, have raised concerns about the potential revenue shortfall. To address this, suggestions have been made for additional levies on certain high-value goods above the 40% sin tax.

Analysts, however, argue that the reform could enhance revenues in the long run. By streamlining rates, reducing disputes, and encouraging compliance, the new system may lead to higher collections despite the short-term dip. A recent S&P Global analysis suggested that a simpler GST structure would improve transparency and efficiency in the indirect tax system, ultimately boosting government income.

Industry and Regional Demands

Industry groups have seized the opportunity to push for sector-specific relief. Mobile phone manufacturers have urged the government to shift smartphones from the 18% bracket to the 5% slab, arguing that they are essential commodities in today’s economy. Similarly, resident welfare associations (RWAs) in Gurgaon have asked for GST on monthly maintenance bills to be reduced from 18% to 5%, with the exemption threshold increased to ease the burden on households.

In Ludhiana, industrial bodies have demanded faster reforms and timely refunds, particularly for the textile and garment sectors, to avoid working capital blockages. These appeals highlight that while the reform is broadly welcomed, expectations for further rationalisation remain strong.

The Road Ahead

The GoM’s recommendation will now be reviewed by the GST Council, which consists of the Union Finance Minister and state finance ministers. The final decision is expected before the festive season, likely in September or October, ensuring that consumers reap the benefits of cheaper goods during Diwali shopping.

There are also discussions about reviving anti-profiteering measures to make sure companies pass on the benefits of tax cuts to customers, avoiding situations where businesses absorb the gains for higher margins.

Conclusion

The approval of a two-slab GST system by the GoM represents a watershed moment in India’s indirect tax journey. By collapsing multiple slabs into a simpler structure, the government seeks to make GST more transparent, consumer-friendly, and business-friendly. If implemented smoothly, the reform could revive consumer demand, reduce compliance burdens, and strengthen India’s growth trajectory.

The challenge, however, lies in balancing revenue concerns with affordability. As the GST Council prepares for its crucial decision, all eyes are on how this reform will reshape India’s taxation landscape in the months ahead.

(Sources: India TV News, India Today, NDTV)