R. Suryamurthy
The government is preparing to roll out a major overhaul of the Goods and Services Tax (GST) structure, aiming to simplify rates, reduce compliance burden, and spur consumption in the run-up to the festive season.
According to people familiar with the matter, the proposal under consideration would replace the current multiple-rate system with two principal slabs – 5% for essential goods and 18% as the standard rate. The top slab of 28% would be scrapped, with items in this category migrating to 18%, while almost all goods currently taxed at 12% would move to the 5% slab. A peak rate of 40% would continue to apply on tobacco and other so-called “sin goods.” Exempted items and those taxed at 0.25% and 3% would remain unchanged.
Two-day meeting of GST Council to begin on Sept 3. The 56th Meeting of the GST Council will be held on the 3rd and 4th of next month in New Delhi. Union Finance Minister Nirmala Sitharaman will chair the meeting.
Compensation cess is also to be phased out, potentially absorbed into the new 40% band.
“The Centre has proposed to overhaul the GST structure to lower the overall incidence of tax and aid consumption,” said Madan Sabnavis, chief economist at Bank of Baroda. “The plan is expected to be in place before the festival season, to give a boost to sales for the consumer goods sector.”
Sabnavis noted that while the broader fiscal impact would need to be assessed, fewer slabs would simplify compliance and could lower inflation if prices of everyday items fall. He added that reduced taxes on consumer goods such as hair oil, toothbrushes and pencils may not trigger a surge in consumption directly, but would free up household resources to spend elsewhere, supporting overall demand.
Industry bodies have begun flagging sector-specific priorities. The Confederation of All India Traders (CAIT) welcomed the reforms as a “consumer bonanza,” but urged the government to reclassify carbonated beverages under the 18% slab, citing that beverages account for nearly 30% of kirana store sales. “Rationalising GST on this category would ease operating pressures for small traders and accelerate formalisation,” said CAIT President B.C. Bhartia.
The Hotel Association of India (HAI) said rationalisation was critical to India’s tourism ambitions, warning that the 18% levy on hotel tariffs risks undermining competitiveness against global destinations. HAI urged raising the threshold for the 12% bracket on hotel rooms from ₹7,500 to ₹15,000 to account for inflation, and called for a uniform 5% GST rate with input tax credit across hotels, restaurants, and tourism services. “The rate of 18% tax for hotels is too prohibitive and puts India’s competitiveness globally at risk,” said HAI President Kachru.
The Indian Vegetable Oil Producers’ Association (IVPA), representing the edible oil refining sector, pressed for resolution of the inverted duty structure refund issue. Since 2022, restrictions on refund of accumulated input tax credit (ITC) have strained working capital and discouraged investment. “Blocking refunds makes operations less viable, especially for MSMEs and local manufacturers,” the IVPA said, warning that unrecovered ITC is pushing up consumer prices and risks encouraging use of unsafe, adulterated oils.
Economists say the biggest test for the reform will be whether it remains revenue-neutral. Currently, about two-thirds of GST collections come from the 18% slab, while 10–11% stem from the 28% bracket, which may shift down to 18%. While this could ease consumer costs, Sabnavis cautioned that if some goods are moved to the 40% rate, inflationary pressures could arise.
On balance, the reform is expected to benefit consumer goods, hospitality, and small retailers, though its fiscal implications for the Centre remain to be seen. “Any restructuring has to be a zero-sum game – if the consumer gains, the budget must absorb the let-off. That, however, can correct itself as the economy grows faster,” Sabnavis said.