Govt plans big GST reform: How it will impact prices, sectors and your wallet

New Delhi: In a step toward simplifying the Goods and Services Tax (GST) structure, the central government has proposed a two-rate system comprising 5% and 18% tax slabs, replacing the current four-tier system. The proposal, if approved, will mark a major reform in India’s indirect taxation regime ahead of Diwali 2025, highly placed sources said.

The revamped structure eliminates the existing 12% and 28% slabs, retaining only 5% and 18% as primary rates, along with a special rate of 40% for a select category of luxury and sin goods.

Proposal sent to states, final call with GST council

The proposal has been forwarded to the Group of Ministers (GoM) on GST rate rationalisation, comprising state finance ministers, who will deliberate on it and present their recommendations to the GST Council.

This overhaul, aimed at simplifying compliance and reducing tax evasion, comes as the Centre prepares for the next-generation GST reform, marking eight years since the indirect tax was rolled out in July 2017.

What changes for taxpayers and businesses?

Under the proposed framework:

• 99% of goods currently under the 12% slab are expected to shift to 5%, making essentials and commonly used items more affordable.
• Nearly 90% of items under the 28% slab, including electronics and certain services, will move to 18%, significantly reducing the top-tier tax burden for most sectors.
• A special rate of 40% will apply only to seven items, including tobacco and online gaming, which fall under the sin and demerit goods category. The total tax incidence on tobacco, however, will remain unchanged at 88%.

Boost for key sectors

According to government estimates, eight sectors are expected to benefit significantly from this rationalisation: Textiles, fertiliser, renewable energy, automotive, handicrafts, agriculture, health and insurance

These labour-intensive and consumer-driven sectors may see reduced tax liability, leading to increased affordability and wider market access.

Revenue impact and government’s confidence

Officials admit that the new slab structure could initially lead to a short-term revenue dip. However, the government is confident that higher consumption, resulting from lower effective tax rates, will offset the revenue loss in the months following implementation.

“There will be a gap in revenues because of the rejig, but the revenue will be offset in the next few months,” a senior government official said, adding that the new structure is likely to be implemented by the early third quarter.

Why now?

The timing of the reform is strategic. With the compensation cess (used to repay borrowings taken to compensate states for revenue shortfalls) nearing its end, the government sees this as an opportunity to streamline the tax system.

Additionally, officials pointed out that multiple GST slabs across the supply chain have been exploited to generate fake invoices and claim fraudulent input tax credits, leading to major revenue leakage.

Under the GST Act, the maximum tax that can be levied on any good or service is capped at 40%, a rate now reserved only for a handful of demerit goods.

Export-oriented sectors such as diamonds and precious stones will continue to be taxed at their existing rates and are unlikely to be impacted by the new regime.