'Next Gen GST' precursor to eventual single tax slab GST: Sources

Senior government officials said the proposed new GST regime, which slashes tax rates and assigns just two slabs of 5 per cent and 18 per cent, will boost the economy and also serve to mitigate tariff threats.

New Delhi: Describing the proposed GST tax reforms as ‘Next Gen GST’, senior government officials on Saturday said that the two-slab tax regime will eventually pave the way for a single sales/services tax rate, hopefully by 2047.

They said the proposed new GST regime, which slashes tax rates and assigns just two slabs of 5 per cent and 18 per cent, will boost the economy and also serve to mitigate tariff threats.

The proposed two-slab regime, if approved by the GST Council, will replace the current four slabs in the goods and services tax (GST) regime, doing away with the 12 per cent and 28 per cent slabs.

Calling it the "next Gen GST’, one government official said "it is a game changer reform. In the pantheon of economic reforms seen in India, it's right up there." The officials spoke on condition of anonymity.

They said the new structure would mean that almost all of the common use items will move to the lower tax bracket, leading to price cuts, which in turn would boost consumption.

"Lower taxes means it will put more money in people's pockets. It will obviously lead to more consumption," the official said.

The Centre’s proposal for a 5 and 18 per cent tax rate on merit and standard goods and a 40 per cent tax for sin goods, has been a “large canvas exercise” to ensure stability in tax rates, the officials said, explaining the rationale behind the exercise.

The changes that have come about after nearly six months of deliberations and dozens of meetings, have been conceived in a way so as to ensure that demand for tax tweaks do not come and also input tax credit (ITC) do not get accumulated in the system.

Once the Centre’s proposal is accepted by the Group of Ministers (GoM) and is approved by the GST Council, it will end the flux of tax rates and ensure stability, the officials said.

“What we have suggested is a ‘Next Gen GST’ keeping the needs of the middle class, poor, farmers, and MSMEs in mind. Also, it has been ensured that tax on daily use items are low,” the official told PTI.

"Once the system is put in place and India becomes a developed nation, we can think about a single rate GST," said the official, adding that a single rate structure is suitable for developed countries where income and spending capacities are uniform.

“The ultimate aim is to move to a single slab structure,” the official said, adding that the time, however, is not right at present.

The official said that during the process of overhaul, every due process is being followed. The Centre has taken the steering role but is protecting constitutional obligations by sharing it with the Group of Ministers (GoM) on rate rationalisation.

"We have looked at every item, item by item and in some cases we have gone back and forth 3-4 times. Whether it is pesticide for use by farmers or pencils for students or some raw material or intermediaries for MSMEs, every item has been discussed threadbare and categorised in the merit or standard slab,” the official added.

As many as 99 per cent of the items in the 12 per cent category such as butter, fruit juices and dry fruits would move to 5 per cent tax rate. Similarly, electronic items like ACs, TVs, fridges, and washing machines as well as other goods like cement will be among the 90 per cent of the items that would move from 28 per cent to lower 18 per cent slab.

The move comes after US President Donald Trump slapped a 25 per cent tariff on all goods India exports to the US, and planned doubling of the levy to 50 per cent from August 27 to punish New Delhi for its oil purchases from Russia. The tariffs are likely to impact USD 40-billion of non-exempt Indian exports such as that of gems and jewellery, textiles and footwear.

Prime Minister Narendra Modi in his Independence Day address to the nation on Friday emphasised that India should become self-reliant and consume what is made in India.

The tax slabs that the Union Finance Ministry has proposed will go to a group of ministers from different states and after their concurrence will be placed before the all-powerful GST Council, which is headed by Union Finance Minister and comprises representatives of all states and UTs.

The Council is expected to meet next month to deliberate on the tax reform proposal.

About 20 per cent of items, including packaged food and beverages, apparel and hotel accommodation currently are taxed at 12 per cent GST and accounts for 5-10 per cent of consumption and 5-6 per cent GST revenue. Moving them to a lower 5 per cent slab may lead to loss of revenue but the Central government is hopeful that a boost in consumption would be able to make up for the deficit in the next few months.