On August 15, India’s Prime Minister delivered the Independence Day speech, which included a major announcement regarding upcoming reforms in the Goods and Services Tax (GST). The Prime Minister hinted that this Diwali, the government would provide a “next-generation tax gift” to the common man by reducing the tax burden through GST reforms. This statement has sparked widespread discussion and speculation in both the markets and among taxpayers.
According to reports and inputs from government sources, the GST Council, guided by suggestions from the Group of Ministers (GoM), is considering significant rate rationalization. Until now, multiple possibilities were being discussed. One scenario suggested retaining 5%, 18%, and 28% while removing the 12% slab. Another suggested keeping 5%, 12%, and 28% while removing 18%. A third possibility was to merge the 12% and 18% slabs into a single 15% rate. However, new developments indicate a different structure altogether.
Latest reports suggest that the government may move towards three primary GST slabs: 5%, 18%, and 40%. If implemented, this would mean removing the current 12% and 28% categories. This new three-tier structure has created fresh debates in the market and among industry experts.
A key highlight from these reports is that 99% of the items currently under the 12% slab are expected to shift down to the 5% category, rather than being moved to 18%. This could drastically reduce the tax burden on essential goods, leading to cheaper prices for a wide range of items. Goods such as butter, ghee, processed food items, almonds, packaged fruit juices, ready-to-eat vegetables, pickles, coconut water, umbrellas, and even mobile phones currently taxed at 12% may soon fall under 5%. This would be a significant relief to consumers and a boost to companies operating in these sectors.
The most controversial part of the reform appears to be the introduction of the 40% slab. This highest GST rate is likely to be applied to so-called “sin goods” – items that are considered harmful to health and consumption. Tobacco products, including cigarettes, are almost certain to fall under this category. Currently, tobacco products are taxed at 28% plus cess, but under the new structure, these may directly move to 40%, making them significantly more expensive. Aerated drinks and soft drinks, which already attract 28% GST, could also move into the 40% category, though this remains speculative.
Alcohol, however, is not covered under GST and will remain under the taxation purview of state governments, meaning the 40% GST will not apply to alcoholic beverages. Similarly, petroleum products like petrol and diesel are not expected to be brought under GST as per the current reports.
The removal of the 28% slab raises another crucial question about how items currently taxed under it will be redistributed. Luxury cars, high-end motorcycles, air-conditioners, refrigerators, and other consumer durables are presently taxed at 28%. If some of these move to 40%, their costs will rise sharply, impacting demand. On the other hand, if certain goods move down to 18%, it will bring down prices and could lead to a surge in sales.
For example, luxury cars and high-end motorcycles could be moved to 40%, while smaller motorcycles, which currently face the same 28% GST, may be shifted down to 18%. This would resolve a long-pending demand from the automobile industry, which has argued that affordable two-wheelers should not be taxed at the same rate as luxury vehicles. Similarly, refrigerators and air-conditioners, considered household essentials in today’s times, may also see a tax reduction if moved from 28% to 18%.
The impact of these reforms will also be felt in the stock market. Companies dealing in goods that move from 28% to 18% could see a boost in demand and stock prices, while those in the tobacco and aerated drinks sector may face pressure due to higher taxation under the proposed 40% slab.
In conclusion, India may soon see a simplified GST structure with just three major slabs – 5%, 18%, and 40%. The shift of most 12% goods into 5% will be a positive development for consumers and FMCG companies, while the introduction of a 40% slab for sin goods will make tobacco and possibly aerated drinks more expensive. The big question now is how the government and the GST Council finalize the redistribution of items currently in the 28% bracket. The markets will be watching closely when trading resumes on Monday, as investors react to the prospects of these major tax reforms.
Disclaimer:
The information presented in this article is based on reports, market discussions, and government sources available at the time of writing. Final decisions on GST rates and categories will be taken by the GST Council and the Government of India. Readers are advised to follow official announcements for confirmed updates.
