GST could undergo a substantial reform, with tax slabs being cut and the exempt list being reduced

India may be considering a major overhaul of the goods and services tax (GST) structure as the five-year period of compensation to states comes to an end in July next year. In the most extensive overhaul of the single tax, which went into effect on July 1, 2017, tax slab rearrangement and reductions in exemptions could be considered.

The new regime may only have three major tax rates covering most things, rather than the four that exist now: 5%, 12%, 18%, and 28%. The rewrite will aim to simplify the system while also increasing revenue.

A committee of ministers led by Karnataka’s chief minister is expected to meet soon to finalise its proposals, which could be discussed at the next GST Council meeting.

“A presentation on potential income scenarios was provided at the most recent GST Council meeting… States must now decide how they will handle the issue beyond July “According to a senior government official, the principal items on the agenda will be discussed.

For the following five years, the Centre compensates states for revenue lost as a result of the adoption of GST. States have expressed concern about a major loss in revenue if the compensation programme expires.

Nirmala Sitharaman, the Union Finance Minister, recently stated that the effective GST rate had slid from the intended revenue neutral rate of 15.5 percent to 11.6 percent “knowingly or unintentionally” as a result of multiple rate cuts since the implementation of the GST in July 2017.

These Slabs Reviews are Supported by Policymakers as well

To solve the revenue problem, state and federal policymakers have approved a review of the slabs.

Pruning the list of products currently exempt from the tax, both goods and services, is one option on the table. One possibility is to combine the 5% and 12% levies into a single rate, resulting in a three-slab system of the merged rate, 18%, and 28 percent.

“Discussions have focused on how this rationalisation must be accomplished,” an official said, adding that all possibilities, including redesigning the slabs, are being considered.

With GST revenue collections increasing in recent months, a redesign is being examined.

The GoM will meet on Saturday to go through the details before making final recommendations to the GST Council.

Apart from the four main slabs, jewellery and precious metals are taxed at 0.25 percent and 3%, respectively, with a top-up compensating cess on specified commodities like automobiles. Many everyday things are exempt from GST, making it a complex system prone to categorization disputes and leaks. Nearly 150 goods and over 80 services are exempt from the GST.

In its report, the 15th Finance Commission, led by NK Singh, argued for GST structure rationalisation.

With GST receipts exhibiting a positive trend in recent months, tax experts believe now is the ideal moment to simplify the rate structure.