India's GST Council Proposes Eliminating 12% Tax Slab to Streamline Tax Structure
Background and Rationale: Introduced in July 2017, the GST system was designed to unify India's complex indirect tax regime. Over time, the four-tier structure has been criticized for its complexity and the compliance burden it places on businesses, especially small and medium enterprises. The 12% slab, in particular, has come under scrutiny due to its relatively low contribution to overall GST revenues. According to sources, the 12% slab contributes only about 5% to the total GST revenue, making it the lowest among the four primary slabs.
The Group of Ministers (GoM) on rate rationalisation, led by Bihar Deputy Chief Minister Samrat Chaudhary, has been deliberating on this adjustment. The GoM, initially formed in September 2021 and restructured in November 2023, has been tasked with addressing tax anomalies and refining the GST rate structure. A consensus is emerging among officials and experts that the 12% slab may no longer be necessary, with essential goods potentially moving to the 5% bracket and others to 18%.
Items Affected: Items currently taxed at 12% include a diverse range of products such as condensed milk, packaged drinking water, bicycles, umbrellas, certain footwear, diagnostic kits, and various household items. Services like specified construction activities also fall under this slab. The reallocation of these items is expected to impact pricing, potentially making some goods more affordable while others may become costlier, depending on their new tax classification.
Stakeholder Perspectives: While the central government is advocating for this simplification, some states have expressed reservations. States like Punjab, Bihar, West Bengal, Karnataka, and Himachal Pradesh have raised concerns about potential revenue losses and the uneven impact on different sectors. The Union Finance Minister, Nirmala Sitharaman, is expected to engage with the GoM to address these concerns and seek a consensus.
Economic Implications: Experts suggest that while the move could simplify the tax structure and reduce compliance burdens, it may also have inflationary effects. Shifting items from the 12% to the 18% slab could increase prices for certain goods, affecting consumer demand. Conversely, moving items to the 5% slab could make some products more affordable, potentially boosting consumption. Maintaining revenue neutrality will be a critical challenge in this restructuring.
Next Steps: The GST Council, comprising the Union Finance Minister and state finance ministers, is anticipated to convene in late June or July to deliberate on this proposal. The Council's decision will be pivotal in determining the future course of India's indirect tax regime, with the potential to influence consumer prices and business operations across various sectors.
As the GST system enters its eighth year, this proposed restructuring represents a significant step toward simplifying India's tax landscape, balancing the goals of revenue generation, economic growth, and ease of doing business.
Summary: GST Council's Proposal to Eliminate the 12% Tax Slab
Revenue Considerations: The 12% slab contributes approximately 8% to the total GST revenue, making it the least significant among the four tiers. In contrast, the 18% slab accounts for about 70% of the revenue. The proposed changes aim to maintain revenue neutrality while simplifying the tax structure.
Expected Timeline for Decision: The GST Council, comprising Union and state finance ministers, is expected to convene by the end of June or early July to deliberate on this proposal. The final decision will consider the potential impacts on pricing, compliance, and revenue collection.