Next-Generation GST Reforms Implemented, Slashing Rates on Essentials
The government has rolled out its next-generation GST reforms, consolidating most goods into two main slabs of 5% and 18%. This significant tax overhaul reduces or eliminates taxes on daily essentials like food and medicine, with many items previously taxed at 12% now in the 5% bracket. The government projects the reforms will boost household savings, simplify compliance for businesses, especially MSMEs, and encourage domestic manufacturing as part of a nationwide 'GST Savings Festival'.
Unpacked:
The previous GST system had four main tax slabs (5%, 12%, 18%, and 28%). The new system consolidates most goods into just two main slabs: 5% for essentials and 18% for most other goods, with a new 40% rate for sin and luxury goods. The 12% and 28% slabs have been eliminated, simplifying compliance and rate classification.
The reforms will likely reduce government revenue by an estimated ₹1.1 trillion annually (about 0.3% of GDP), mainly due to lower rates on essentials. However, the government expects to offset this loss through increased consumption, surplus cess collections, higher RBI dividends, and economic growth stimulated by the tax cuts.
The earlier GST regime was criticized for its complexity, confusion over multiple tax slabs, compliance burdens, an inverted duty structure, and delayed refunds. The new reforms aim to simplify the structure, correct duty imbalances, speed up refunds, and make compliance easier, especially for MSMEs.
Luxury and sin goods—such as tobacco products, carbonated drinks, and high-end automobiles—will now attract a higher GST slab of 40%. Most other goods fall into the 5% or 18% slabs, while health and life insurance premiums are exempt from GST.