Government proposes eliminating highest tax bracket and reducing rates on everyday items from October, potentially saving consumers billions
Prime Minister Narendra Modi has proposed India's biggest tax overhaul since 2017, aiming to reduce GST rates on everyday goods and small cars starting October. The reform would eliminate the 28% tax bracket and move most items from 12% to 5%, though it needs approval from the GST Council representing all states before implementation.
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The proposed changes come as Modi seeks to boost consumption and ease inflation pressures. The reform could reduce government revenue by $20 billion annually, according to IDFC First Bank estimates, but economists expect it to stimulate economic growth.
Understanding India's Current GST Structure
India's Goods and Services Tax system, introduced in 2017, replaced over a dozen state taxes with a unified structure. The system was meant to create "one nation, one tax, one market" but has faced criticism for its complexity.
The current system has four main tax slabs:
- 5% for basic necessities
- 12% for standard goods
- 18% for most services and products
- 28% for luxury items
Some products face additional levies beyond the 28% rate, including cigarettes and high-end vehicles.
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Current GST Tax Structure
| Tax Rate | Product Examples | Revenue Share |
|---|---|---|
| 5% | Basic food items, medicines | 15% |
| 12% | Butter, fruit juices, dry fruits | 11% |
| 18% | Most services, electronics | 67% |
| 28% | Cars, ACs, refrigerators | 7% |
The complexity has led to odd situations. Pre-packaged salted popcorn faces a 12% tax while caramel popcorn is taxed at 18%. Plain Indian flatbreads attract 5% tax, but flaky, multi-layered varieties face 18%. These inconsistencies have confused both businesses and consumers.
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What Changes Are Proposed?
The reform plan includes several key changes:
- Eliminating the 28% bracket entirely - Products like cars, air conditioners, and refrigerators would move to lower brackets
- Shifting 99% of items from 12% to 5% - This includes butter, fruit juices, and dry fruits
- Small cars would be taxed at 18% instead of the current 28%
- Personal care items like hair oil and toothpaste would see lower taxes
- Construction materials like cement could also see reduced rates
The government collected $224 billion from GST last year. These changes could reduce collections by about $20 billion annually.
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Who Benefits from These Changes?
Consumers would see immediate benefits through lower prices on:
- Small cars and two-wheelers
- Home appliances like TVs, refrigerators, and air conditioners
- Personal care products
- Food items currently in the 12% bracket
Manufacturers like Samsung and LG Electronics could see increased demand as appliance prices drop. The construction sector might benefit from lower cement taxes, potentially boosting housing affordability.
Economic Impact and Considerations
The reform could have several macroeconomic effects. Lower taxes would reduce inflationary pressures, potentially allowing the Reserve Bank of India to cut interest rates further. IDFC First estimates the changes could boost India's nominal GDP by 0.6 percentage points over 12 months.
Since consumption contributes about 60% of India's GDP, cheaper goods could stimulate economic growth. However, the 18% tax bracket, which generates 67% of GST revenue, would remain unchanged, limiting the fiscal impact.
The Path to Implementation
Despite the announcement, implementation isn't guaranteed. The GST Council must approve any changes. This body includes Finance Minister Nirmala Sitharaman and representatives from all Indian states.
State governments may resist the changes since GST forms a larger portion of their revenues compared to the federal government. They'll need assurance about compensation for lost revenue before agreeing to rate cuts.
The council operates on consensus, making negotiations complex. Past GST reforms have taken months of discussion before implementation.
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Historical Context
When GST launched in 2017, it was hailed as India's biggest tax reform since independence. The system replaced a patchwork of state taxes that created barriers between states and complicated business operations.
However, the initial rollout faced significant challenges. Small businesses struggled with compliance, and the multiple tax rates created confusion. The government has made several adjustments since then, but this would be the most comprehensive overhaul yet.
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If approved, the reforms could take effect from October 2024. Businesses would need time to adjust their pricing and accounting systems. The government would likely phase in changes to minimize disruption.
Economists view the proposal as politically strategic, coming amid trade tensions with the United States and ahead of several state elections. Lower prices on everyday goods could boost Modi's popularity among middle-class voters.
The success of these reforms will depend on smooth implementation and whether the economic benefits outweigh the revenue loss. State governments' response will be crucial in determining whether Modi's ambitious tax reform becomes reality or remains a proposal.
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For now, consumers and businesses await the GST Council's decision, hoping for relief from the current complex tax structure that has puzzled everyone from popcorn vendors to car manufacturers.
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