Centre proposes to move to a two-slab 'standard and merit' GST structure

GST

In the next generation of GST reforms, announced by Prime Minister Narendra Modi in his 79th Independence Day address, the Centre has proposed to "essentially move towards simple tax" with 2 slabs—"standard and merit", with special rates applicable for only for select few items, the finance ministry said on Friday.

In a statement issued after the PM’s address, the ministry said that the central government has sent its proposal on GST rate rationalisation and reforms — specifically linked to structural reforms, rate rationalisation, and ease of living — to the Group of Ministers (GoM) constituted by the GST Council to examine this issue.

In his address, Modi announced that the government will roll out next-generation reforms to the GST by Diwali, including a major reduction in tax rates. Addressing the nation from the Red Fort on the 79th Independence Day, the Prime Minister described the upcoming changes as a “Diwali gift” aimed at easing the tax burden on citizens.

“This Diwali, I am going to make it a double Diwali for you. Over the past eight years, we have undertaken a major reform in GST. Now, we are bringing next-generation GST reforms. This will reduce the tax burden across the country,” Modi said.

The announcement comes at a time when discussions are underway to rationalise GST rates for various products. A group of state finance ministers, led by Bihar Deputy Chief Minister Samrat Chaudhary, is examining potential rate cuts. Another panel of state ministers is focusing on lowering or removing GST on health and term life insurance products, with a decision expected soon.

The finance ministry said that the government has proposed, to the GoM, a reduction in tax rates on common man items and aspirational goods, as it would enhance affordability, boost consumption, and make essential and aspirational goods more accessible to a wider population.

Sources had told Moneycontrol earlier, one key proposal under consideration by the GoM is the removal of the 12 percent GST slab, with goods in this category likely to be moved either to the 5 percent or 18 percent brackets. The GST system currently applies five main rates — nil, 5 percent, 12 percent, 18 percent, and 28 percent.

The ministry also noted that the end of GST compensation cess has created fiscal space, providing greater flexibility to rationalise and align tax rates within the GST framework for long-term sustainability. As per sources, the GST Council is expected to take a call on the future of the compensation cess by October, as the repayment of the GST compensation loan, raised to meet the shortfall in states’ revenues during the pandemic, is likely to be done ahead of schedule.

A compensation cess is levied on select luxury and sin goods —  such as cigarettes and high-end automobiles — in the 28 percent category. This cess, initially meant to shield states from revenue loss during the GST rollout for five years until June 2022, has been extended to March 31, 2026, to repay the Rs 2.69 lakh crore the Centre borrowed during the pandemic to fill the cess fund gap.

The government’s proposal to GoM also includes the correction of inverted duty structures to align input and output tax rates so that there is a reduction in the accumulation of input tax credit; resolving classification issues to streamline rate structures, minimise disputes, simplify compliance processes, and ensure greater equity and consistency across sectors; as well as providing long-term clarity on rates and policy direction to build industry confidence and support better business planning.

On the ease of living front- the Centre wants to ease registration process to make it seamless, technology-driven, and time-bound, especially for small businesses and startups. Implement pre-filled returns, thus reducing manual intervention and eliminating mismatches. And execute faster and automated processing of refunds for exporters and those with inverted duty structure.

The Centre has taken this initiative with the aim of building a constructive, inclusive, and consensus-based dialogue among all stakeholders. 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 as envisioned by PM Modi, said the finance ministry.

"The GST Council, when it meets next, will deliberate on the recommendations of GoM, and every effort will be made to facilitate early implementation so that the intended benefits are substantially realised within the current financial year," the ministry said.

The planned restructuring is being timed with the stabilisation of GST collections and strong macroeconomic indicators. The move also aligns with India’s upcoming free trade agreements with several developed economies, where the government is seeking to remove tariff barriers that could hold back domestic industry growth.

In July, reports indicated that the Prime Minister’s Office had given an in-principle nod to the overhaul. For consumers, the most visible change could be the migration of several goods from the 12 percent slab to the 5 percent category, directly reducing retail prices.

"These are not merely procedural changes; they are essential structural reforms designed to mitigate the risks arising from global trade tensions. By addressing the inverted duty structure, we are unlocking crucial working capital and making our exports more competitive on the global stage," Saurabh Agarwal, Partner, EY India.

Krishan Arora, Partner, Grant Thornton Bharat said that it seems the rate fitment work is complete and one could expect the rate rejig of items of daily consumption falling in 12% to 5% which could help not reduce end product prices but also boost consumption and demand especially for MSMEs.