New Delhi, Aug 18: The proposed ‘Next Gen GST’ with sweeping reforms, lower tax rates, and just two slabs, aims to boost the economy amid tariff threats and set the stage for a single tax rate regime by the time India becomes a developed nation, government sources said.They said the proposed new GST regime, which slashes tax rates and assigns just two slabs of 5 per cent and 18 per cent, will boost the economy and also serve to mitigate tariff threats.
The proposed two-slab regime, if approved by the GST Council, will replace the current four slabs in the Goods and Services Tax (GST) regime, doing away with the 12 per cent and 28 per cent slabs.
Calling it the “next Gen GST’, a government official said, “It is a game changer reform. In the pantheon of economic reforms seen in India, it’s right up there”. The officials spoke on the condition of anonymity.
Government sources said the new structure would mean that almost all of the common-use items will move to the lower tax bracket, leading to price cuts, which in turn would boost consumption.
Terming the overhaul as “reformed and refined GST”, a source said the Centre did not want a short-term solution in the tax rate rationalisation and, with the Compensation Cess coming to an end, a Next Gen GST was necessary.
“Lower taxes mean it will put more money in people’s pockets. It will obviously lead to more consumption,” the official said.
The Centre’s proposal for a 5 and 18 per cent tax rate on merit and standard goods and a 40 per cent tax for sin goods has been a “large canvas exercise” to ensure stability in tax rates, officials said, explaining the rationale behind the exercise.
The changes that have come about after nearly six months of deliberations and dozens of meetings have been conceived in a way to ensure that demand for tax tweaks does not arise, and also that input tax credit (ITC) does not get accumulated in the system.
Once the Centre’s proposal is accepted by the Group of Ministers (GoM) and is approved by the GST Council, it will end the flux of tax rates and ensure stability, the officials said.
“What we have suggested is a ‘Next Gen GST’ keeping the needs of the middle class, poor, farmers, and MSMEs in mind. Also, it has been ensured that tax on daily use items is low,” the official told PTI.
“Once the system is put in place and India becomes a developed nation, we can think about a single rate GST,” the official said, adding that a single rate structure is suitable for developed countries where income and spending capacities are uniform.
The ultimate aim is to move to a single slab structure,” the official said, adding that the time, however, is not right at present.
According to the official, during the process of overhaul, every due process is being followed. The Centre has taken the steering role but is protecting constitutional obligations by sharing it with the Group of Ministers (GoM) on rate rationalisation.
“We have looked at every item, item by item and in some cases, we have gone back and forth 3-4 times. Whether it is pesticides for use by farmers or pencils for students or some raw material or intermediaries for MSMEs, every item has been discussed threadbare and categorised in the merit or standard slab,” the official added.
As many as 99 per cent of items in the 12 per cent category, such as butter, fruit juices and dry fruits, would move to a 5 per cent tax rate. Similarly, electronic items like ACs, TVs, fridges, and washing machines, as well as other goods like cement, will be among the 90 per cent of the items that will move from 28 per cent to a lower 18 per cent slab.
The move comes after US President Donald Trump imposed a 25 per cent tariff on all goods India exports to the US, and planned doubling of the levy to 50 per cent from August 27 to punish New Delhi for its oil purchases from Russia. The tariffs are likely to impact USD 40 billion of non-exempt Indian exports such as gems and jewellery, textiles and footwear.
Prime Minister Narendra Modi, in his Independence Day address to the nation on Friday, emphasised that India should become self-reliant and consume what is made in India.
The tax slabs that the Union Finance Ministry has proposed will go to a group of ministers from different states, and after their concurrence, will be placed before the all-powerful GST Council, which is headed by the Union Finance Minister and comprises representatives of all states and UTs.
The council is expected to meet next month to deliberate on the tax reform proposal.
About 20 per cent of items, including packaged food and beverages, apparel and hotel accommodation, are currently taxed at 12 per cent GST and account for 5-10 per cent of consumption and 5-6 per cent GST revenue.