PMO Approves Major Revamp of GST: Key Changes Ahead for Companies
Since its introduction in 2017, the Goods and Services Tax (GST) is poised for its first significant overhaul. The proposed changes aim to simplify the tax structure, potentially lowering the tax rate on items currently taxed at 12% to 5%. The Prime Minister’s Office has given its preliminary approval for this restructuring, which is expected to be discussed at the upcoming GST Council meeting following the monsoon session of Parliament.
Proposed Changes to GST Slabs
The current GST framework consists of five tax rates: nil, 5%, 12%, 18%, and 28%, along with special rates of 0.25% and 3% applicable to precious metals. Approximately 21% of all goods fall under the 5% category, while 19% are in the 12% bracket. The 18% slab encompasses 44% of goods, and the highest 28% rate applies to only 3% of items. Authorities are considering eliminating the 12% tax bracket and redistributing these items between the 5% and 18% slabs.
Additionally, a compensation cess is imposed on certain luxury and harmful products, such as cigarettes and automobiles, within the 28% bracket. This cess was initially introduced to safeguard states from revenue losses during the GST transition and was set to last for five years until June 2022. However, it has since been extended to March 31, 2026, to address a ₹2.69 lakh crore debt incurred by the Centre during the COVID-19 pandemic. The GST Council has formed a dedicated group of ministers to assess the use of excess funds from cess collections and to determine future actions regarding this issue.
Timing and Economic Context
The timing of this restructuring appears favorable, as tax systems have stabilized and economic indicators remain robust. With upcoming free trade agreements with developed nations, the government aims to eliminate barriers that could hinder the growth of domestic industries. The proposed changes are expected to streamline procedures and modify tax slabs, benefiting both consumers and businesses alike.
In parallel, the income tax legislation is also set for an overhaul, with a new Income Tax bill anticipated during the monsoon session. This comprehensive approach to tax reform reflects the government’s commitment to improving the overall tax structure and enhancing economic growth.
Next Steps for Implementation
The finance ministry is set to initiate discussions with state governments to secure political consensus on implementing these GST reforms. Internal consultations with relevant departments have already begun regarding the proposed changes. The restructuring is expected to lead to both modifications in tax slabs and streamlined procedures.
Despite the establishment of a ministerial group to evaluate rate rationalization, progress has been slow. Industry representatives have made compelling arguments for reforming the GST structure, emphasizing the need for adjustments to rates, slabs, and operational procedures. Members of Parliament from various political parties have also raised concerns regarding GST-related issues that require urgent attention. Senior government officials have engaged in extensive discussions, and policy experts believe that a more streamlined GST system could significantly boost economic growth.
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