A sweeping overhaul of the Goods and Services Tax (GST) is set to be discussed this week even as states raise red flags over the potential hit to their revenues.
According to a report in Mint, the Centre plans to push ahead with a simplified two-rate structure of 5% and 18%, eliminating the 12% and 28% brackets and creating a 40% slab for luxury and so-called “sin” products. While the reform is meant to streamline the tax regime, it could lower GST collections by an estimated Rs 50,000–55,000 crore this year, Mint said.
States Demand Compensation, Centre Reluctant
Officials told Mint that the Union government will acknowledge states’ concerns at the GST Council meeting on Wednesday and Thursday but is unlikely to offer direct compensation for lost revenue, unlike in GST’s early years. Ministers from eight non-BJP states — including Kerala, Tamil Nadu, Punjab, and West Bengal — met in New Delhi last week, demanding a fresh compensation framework. They argue that without such support, their social and development spending could suffer. Kerala Finance Minister KN Balagopal told Mint that the “tax rationalisation proposals entail huge revenue losses” and warned that not compensating states would hurt welfare schemes.
Centre Banks on Consumption Boost
The Centre, however, believes any shortfall will be offset by stronger consumption. One official told Mint that previous tax cuts had spurred demand, helping revenues recover. Analysts cited in the report said the reduction in rates on mass-consumption goods could drive household spending, though the impact will depend on how sensitive demand is to price changes. EY India’s DK Srivastava told Mint that relief on key commodities would provide “some increase in domestic demand,” while Suranjali Tandon of NIPFP cautioned that not all products would see sharp jumps in sales given wage growth concerns.
Data Bolsters Centre’s Case
As Mint highlighted, the Centre is expected to present GST revenue trends to reassure states. Despite repeated rate cuts in the past, collections have grown steadily, rising from an average of about Rs 92,500 crore per month in FY18 to more than Rs 2 trillion so far this financial year. While collections dipped during the pandemic year, the rebound in subsequent years has been strong, reinforcing the government’s confidence in pushing through the new structure.
Industry Prepares for Transition
Businesses will need to prepare for the transition, experts told Mint. Sandeep Sehgal, Partner–Tax at AKM Global, noted that shifting products from one slab to another could directly affect margins, pricing, and compliance systems. Companies may need to update ERP platforms, rework contracts, and train staff to adapt. Sehgal also stressed that any reduction in GST rates must benefit end consumers, warning that failure to pass on gains could trigger disputes under anti-profiteering rules.
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