Simplified tax structure imminent: Replacement of existing 5-28% tax rates with a two-tier structure, as per the Finance Ministry, promising tax reductions.
Simplified GST System Proposed in India: A Boost for Common Man and Small Businesses
In a significant move aimed at providing substantial tax relief to the common man and small businesses, Prime Minister Narendra Modi has announced plans to reform the Goods and Services Tax (GST) system in India. The announcement comes as GST marks its eighth anniversary, having evolved into one of India's most significant post-independence tax reforms.
The proposed changes will replace the current four-rate structure of 5%, 12%, 18%, and 28% with a simpler, two-tier system consisting of a "standard" rate of 5% and a "merit" rate of 18%. Goods currently taxed at 12% will move to the 5% slab, and about 90% of goods currently under the 28% slab will shift to the 18% slab.
This simplification and rate rationalisation are designed to provide tax relief to the common man and small businesses in several ways:
- Lowering GST rates on essential and everyday goods: The reduction of taxes on common man items and aspirational goods will make products more affordable, boosting consumption for ordinary consumers, including women, students, farmers, and the middle class.
- Reducing the tax burden on small and medium enterprises (SMEs): The reforms aim to help SMEs save costs by simplifying compliance requirements and lowering effective tax rates. This will encourage formalisation and support the growth of these businesses.
- Addressing inverted duty structures: The correction of inverted duty structures, where input taxes exceed output taxes, is aimed at aligning input and output tax rates to support domestic value addition. This will particularly benefit manufacturing competitiveness and working capital for businesses.
- Encouraging economic growth and supporting key sectors: The proposed reforms will help streamline rate structures, minimise disputes, and simplify the tax framework. This will support economic growth and key sectors like agriculture, textiles, health, insurance, automobiles, and renewable energy.
The high-level task force for next-generation reforms in governance, taxation, and public service delivery, formed by PM Modi, will focus on providing long-term clarity on rates and policy direction to build industry confidence and support better business planning. The task force will also work on resolving classification issues and ensuring greater equity and consistency across sectors.
The proposal has been sent to the Group of Ministers (GoM) constituted by the GST Council for examination. The aim is to implement these reforms by October 2025 (Diwali), making GST easier to understand and comply with, while improving economic momentum and disposable incomes.
With these proposed reforms, the end of the compensation cess has created fiscal space, providing greater flexibility to rationalise and align tax rates within the GST framework for long-term sustainability. The proposed GST system is expected to significantly reduce taxes, providing tax relief to the common people.
[1] The Economic Times - "GST Council to consider two-tier rate structure for goods" [2] Business Standard - "GST Council to consider two-tier rate structure for goods" [3] Livemint - "GST Council to consider two-tier rate structure for goods" [4] Financial Express - "GST Council to consider two-tier rate structure for goods" [5] India Today - "GST Council to consider two-tier rate structure for goods"
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