Rate rationalisation, 2-slab GST & compensation cess future top 56th GST Council’s agenda

About 175 items can see a reduction in GST rates

The much-awaited 56th GST Council meeting begins today in the national capital, which is eagerly being tracked by the Indian consumer and industry.

As mentioned by Finance Minister Nirmala Sitharaman, the Council in its 2-day meeting is expected to discuss the long-pending rate rationalisation issue, which would result in substantial reduction in prices of daily-use as well as high-end items.

"We are in favour of the Central government’s proposals, as it’s in favour of the common man. The issue of compensation to states, due to loss in revenue, is not as important as providing relief to citizens," a state finance minister on condition of anonymity told Moneycontrol on Tuesday.

According to the Centre’s proposal, which was approved by Group of Ministers (GoM) last month, dual GST-slab structure would exist going forward. Almost all items in the 28 percent slab, barring sin goods, would move to 18 percent slab; and those in 12 percent would move to the 5 percent slab. Another slab of 40 percent would exist, which will be levied on 6-7 items, largely sin and demerit goods.

Prime Minister Narendra Modi in his Independence Day address had said that the government will roll-out next generation GST reforms by Diwali, which will reduce "tax burden across the country".

According to official sources, about 175 items can see a reduction in GST rates, which include processed foods, almonds, snacks, ready-to-eat items, jam, ghee, butter, pickles, murabba, chutney, automobiles, tractors, electronics, ACs, refrigerators etc.

Sources say the average GST rate on all items, currently around 11.5 percent, would reduce to below 10 percent, if the rate-cut proposal of the Group of Ministers (GoM) is accepted by the GST Council.

On August 21, Bihar Deputy Chief Minister Samrat Choudhary had said that the GoM has accepted the Central government’s proposal to move towards a dual structure of 5 percent and 18 percent. Officials have estimated a loss in revenue to the tune of Rs 80,000 crore for Centre and states annually, on account of moving items from 12 percent slab to 5 percent.

On the contentious levy on health and life insurance premiums, the GoM has proposed that these premiums should be exempt from GST, even as it would result a massive decline in revenues. According to Telangana Deputy Chief Minister Mallu Bhatti Vikramarka, a complete exemption on health and life insurance premiums for individuals would entail an estimated revenue loss of Rs 9,700 crore annually.

Moreover, the Council would likely deliberate ending the compensation cess by October 31, ahead of the deadline, as loans raised during the pandemic years approach full repayment.

The deadline for the cessation of the GST compensation cess is March 31, 2026 but discussions are underway to end the cess collection earlier, as the repayment of loans raised during the Covid-19 pandemic years to compensate states for revenue shortfall nears completion. Government sources suggested the cess could cease by this October 31, leaving a surplus of approximately Rs 2,000-3,000 crore to be distributed equally between the Centre and the states.

The Council is also likely to discuss a short-term compensation mechanism for states, who will lose revenue due to rate cuts. However, the compensation cess structure, as it exists today, is unlikely to be extended for this purpose.

The compensation cess, introduced in July 2017, was designed to make up for state revenue losses during the initial five years of GST implementation. The GST (Compensation to States) Act, 2017 was enacted to ensure that the Centre should provide compensation to states—for a period of five years from the implementation of GST (July 1, 2017)—to make sure that each state's tax revenue grow by 14 percent annually over a base year of 2015-16.

The legal window for compensation ended in June 2022, the levy was extended until March 2026 to service loans raised during the pandemic years when revenues sharply declined. "There’s no possibility of extending this framework further," an official had told Moneycontrol earlier.