Finance ministry proposes 2-tier GST structure, special rates on select items; Council meet likely in Sept

New Delhi: The finance ministry on Friday said it has proposed a two-slab GST rate structure to the Group of Ministers (GoM), along with special rates for select few items, as the government looks to unveil "next generation" GST reforms in the current financial year which will lower tax burden on daily use items.

The Centre has proposed to a panel of state finance ministers that the Goods and Services tax (GST) regime should have just two slabs where goods and services can be classified as 'standard' and 'merit'. Also, special rates can be levied on select items which will be specified.

Currently, GST is a four-tier tax structure of 5, 12, 18 and 28 per cent, where essential items are either exempted or taxed at the lower tax bracket, while demerit and luxury items at the highest slab. Besides, a compensation cess is levied at varied rates on demerit and luxury items like pan masala and cars.

With the compensation cess regime coming to an end on March 31, 2026, the GST Council will also have to work out a mechanism regarding the rates of tax that can be levied on goods which currently attract compensation cess.

The GST Council, chaired by Finance minister Nirmala Sitharaman and comprising state ministers, is expected to meet in September to discuss the GoM proposal on rate rationalisation.

"The GST Council in its next meeting will deliberate on the recommendations of GoM, and every effort will be made to facilitate early implementation so that the intended benefits are substantially realised within the current financial year," the finance ministry said while unveiling its proposal which has been submitted to the rate rationalisation GoM.

Prime Minister Narendra Modi in his address to the nation on 79th Independence Day announced that 'next generation' GST reforms which will lower tax burden substantially and benefit small industries is in the works and the lower taxes will be a Diwali gift to citizens.

Soon after the announcement, the finance ministry said the Centre has shared its proposal on GST to the GoM which rests on three pillars -- structural reforms, rate rationalisation and ease of living.

Centre's proposal includes reduction of taxes on common man items and aspirational goods, and a reduction in GST slabs by moving towards a simple tax with two slabs and special rates on select few items. This would boost consumption and enhance affordability.

The GST reforms will also seek to reduce classification-related disputes, correcting inverted duty structures in specific sectors, ensuring greater rate stability, and further enhancing ease of doing business. These measures would strengthen key economic sectors, stimulate economic activity, and enable sectoral expansion.

The structural reforms would ensure stability and predictability by providing "long-term clarity on rates and policy direction to build industry confidence and support better business planning".

On the 'ease of living' side, the finance ministry's proposal include seamless, technology driven GST registration, especially for small businesses and startups. It also suggested implementation of pre-filled GST returns and faster and automated processing of refunds for exporters and those with inverted duty structure.

The ministry said the end of compensation cess has created fiscal space, providing greater flexibility to rationalise and align tax rates within the GST framework for long-term sustainability.

The ministry said in the true spirit of cooperative federalism, the Centre remains committed to working closely with the states.

"It will be building a broad-based consensus with the states in the coming weeks to implement the next generation of reforms," the finance ministry said.

The government reaffirms its commitment to evolving the GST into a simple, stable, and transparent tax system -- one that supports inclusive growth, strengthens formal economy and enhances Ease of Doing Business (EoDB) across the country.

Bihar Deputy Chief Minister Samrat Chaudhary is the convenor of the seven-member state-ministerial panel or Group of Ministers (GoM) on GST rate rationalisation. The panel has been tasked with suggesting rate rationalisation and correction of inverted duty structure with an objective of simplifying the rate structure, reviewing the GST exemption list and enhancing revenues.

The GoM was originally set up in September 2021, under then Karnataka Chief Minister Basavaraj Bommai. Under his chairmanship, the panel had submitted an interim report to the GST Council in June 2022, proposing changes in tax rates for some goods and services to rationalise the levy.