Prime Minister Narendra Modi’s Independence Day speech included the mention of a complete overhaul of the Goods and Services Tax (GST) regime in the country by Diwali this year. The news, quite expectedly, created ripples amongst the industry and businesses, since they have been looking forward to changes the GST Council promised months ago.
“This Diwali, I am going to make it a double Diwali for you. This Diwali, you fellow countrymen are going to get a very big gift,” the Prime Minister said, adding that after eight years of GST operations, “the need of the hour is that we should review it once.”
“Tax on items the common man uses will be reduced substantially. Our MSMEs will benefit hugely. Daily use items will become cheaper, which will also strengthen our economy,” the PM said.
The biggest takeaway from the Prime Minister’s speech was the removal of two tax slabs from the four-tier tax slab structure that is currently in use. The “next-generation GST reforms” would substantially reduce the tax burden across the country, said the PM, adding that the move is aimed at benefitting the farmers, the middle class and small businesses.
Also Read: Traders hail PM Modi’s next-gen GST reforms as boost for business
Consumers hope this translates to lowered prices so that the benefits trickle down to them apart from boosting domestic consumption and buffering the economy against external shocks.
A simpler two-slab structure would be a departure from the four-tier structure that was put in place on July 1, 2017, and would include the slashing of the 12 per cent and 28 per cent slabs. There will remain in place the 40 per cent added tax on what are considered sin or luxury goods.
This may mean that goods currently taxed at 12 per cent would be shifted to the 5 per cent tax category, while those taxed at 28 per cent may be shifted to the 18 per cent tax slab.
The Centre has already forwarded its proposal to the Group of Ministers that examine rate rationalisation. It will then place recommendations before the GST Council, which is the apex body on indirect taxation and is headed by Union Finance Minister, Nirmala Sitharaman.
But, will everyday essentials really become more affordable? From groceries to medicines, electronics, even education services – everything may be cheaper or more expensive. We take a look at the changes that can be expected once the GST Council holds its meeting before October.
Compensation cess will cease to exist
As per law, compensation cess will cease to exist after March 31, 2026. In its place, the 40 per cent levy is being considered for goods placed in the last category.
Officials say “99 per cent of items” that are currently in the 12 per cent slab will move to the lower 5 per cent bracket, and 90 per cent of the goods in the 28 per cent category will shift to 18 per cent.
Items that may be cheaper
The Centre claims that essential items including food products, daily-use goods, agricultural equipment, televisions, refrigerators, washing machines, medicines, education and insurance may be cheaper after the changes take effect.
Currently, items that are taxed at 12 per cent include condensed milk, dried fruits, frozen vegetables, sausages, pasta, jams, namkeens including bhujiya, tooth powder, feeding bottles, carpets, umbrellas, bicycles, utensils, furniture, pencils, handbags made of jute or cotton, and footwear under ₹1,000. They could all drop to the 5 per cent tax slab.
Also, goods in the higher 28 per cent bracket, which include cement, air-conditioning machines, dishwashers, monitors, projectors, set-top boxes and television sets including LCD and LED models, could become cheaper at 18 per cent.
Items that may get expensive
There are still at least half-a-dozen “demerit” items, such as cigarettes and online gaming, which would face a new 40 per cent tax rate, which replaces the current compensation cess structure.
Items with rates unchanged
Special rates would remain unchanged, with diamonds continuing to attract 0.25 per cent taxation and gold and silver maintaining 3 per cent taxation, which are mainly for exports after value addition.
Petroleum products are outside the GST framework.
Ease in compliance
Besides rate rationalisation, the GST Council is considering proposals to bolster ease of compliance using technology and faster refunds to exporters, officials said.
Business owners and manufacturers have hailed the proposed changes, saying a move to a two-rate GST structure will put India at par with developed economies that have a low rate of essential goods and another rate for everything else that may be considered non-essential.
The hitch
While simplifying compliances for MSMEs will certainly bring down cost of products and make the market more competitive, thereby strengthening the economy and boosting the country’s ‘Make in India’ mission, some worry that the absence of anti-profiteering provisions may make it incumbent for businesses to pass on the reductions to the consumers.
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