Finanace ministry proposes 2-tier GST structure, special rates on select items

New Delhi: The finance ministry on Friday said it has proposed a two-slab GST rate structure to the Group of Ministers (GoM), along with special rates for select few items, as the government looks to unveil “next generation” GST reforms in the current financial year, which will lower tax burden on daily use items.

The Centre has proposed to a panel of state finance ministers that the Goods and Services tax (GST) regime should have just two slabs, where goods and services can be classified as ‘standard’ and ‘merit’. Also, special rates can be levied on select items, which will be specified.

The GST Council, chaired by Finance minister Nirmala Sitharamanand comprising state ministers, is expected to meet in September to discuss the GoM proposal on rate rationalisation.

GST rates to be cut by Diwali: PM 

Prime Minister Narendra Modi, in his address to the nation on the 79th Independence Day, announced that ‘next generation’ GST reforms, which will lower tax burden substantially and benefit small industries, are in the works and the lower taxes will be a Diwaligift to citizens.

Soon after the announcement, the finance ministry said the Centre has shared its proposal on GST to the GoM, which rests on three pillars — structural reforms, rate rationalisation and ease of living.

Centre’s proposal includes reduction of taxes on common man items and aspirational goods, and a reduction in GST slabs by moving towards a simple tax with two slabs and special rates on select few items. This would boost consumption and enhance affordability.

The GST reforms will also seek to reduce classification-related disputes, correcting inverted duty structures in specific sectors, ensuring greater rate stability, and further enhancing ease of doing business. These measures would strengthen key economic sectors, stimulate economic activity, and enable sectoral expansion.

GST revamp on 7 items

While the presently nil or zero percent GST tax is charged on essential food items, 5 percent is charged on daily use items, 12 percent on standard goods, 18 percent electronics and services and 28 percent on luxury and sin goods, the revamped GST regime will have two slabs plus a special rate of 40 percent for luxury and sin goods, officials said.

When the revamped structure is approved by the GST Council, 99 percent of items in the current 12 percent slab will move to the 5 percent bracket. Similarly, almost 90 percent of goods and services that are currently charged at 28 percent would shift to an 18 percent tax rate.

The special rate of 40 percent would be levied only on seven items, sources said, adding tobacco would also fall under this rate, but the total incidence of taxation would continue at the current 88 percent.

Under the present GST structure, which came into being after central and state levies were subsumed beginning July 1, 2017, the highest 65 percent tax collections happen from the 18 percent levy. The top tax bracket of 28 percent on luxury and sin goods contributes 11 percent of the revenue, while the 12 per cent slab accounts for just 5 percent of the revenue.

The lowest 5 percent levy on essential daily-use items contributes 7 percent of the total GST kitty.

High labour-intensive and export-oriented sectors like diamonds and precious stones would continue to be taxed as per the existing rates.

New GST to give stability: Finance ministry

The structural reforms would ensure stability and predictability by providing “long-term clarity on rates and policy direction to build industry confidence and support better business planning”.

On the ‘ease of living’ side, the finance ministry’s proposal includes seamless, technology-driven GST registration, especially for small businesses and startups. It also suggested the implementation of pre-filled GST returns and faster and automated processing of refunds for exporters and those with an inverted duty structure.

The ministry said the end of compensation cess has created fiscal space, providing greater flexibility to rationalise and align tax rates within the GST framework for long-term sustainability.

The ministry said in the true spirit of cooperative federalism, the Centre remains committed to working closely with the states. “It will be building a broad-based consensus with the states in the coming weeks to implement the next generation of reforms,” the finance ministry said.

The government reaffirms its commitment to evolving the GST into a simple, stable, and transparent tax system — one that supports inclusive growth, strengthens the formal economy and enhances Ease of Doing Business (EoDB) across the country.

The eight-year-old regime, which merged central taxes like excise duty and state levies like VAT into one tax, has led to the indirect tax base doubling to 1.52 crore, but tax rate cuts and the pandemic slowdown have meant net revenue collected has only recently converged to the pre-GST level. It has also seen alleged evasion cases and litigation swell.

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