GST Rate Rationalisation: Towards a Simplified Two-Slab Structure with Expected Consumption Boost

Retail grocery store aisle showcasing various food and household products with a focus on simplifying the GST structure, featuring the text 'Simplified Two-Slab Structure' and icons representing shopping and checkout.

The proposal under discussion seeks to rationalise the GST rate structure by reducing the number of tax slabs and shifting most goods into fewer categories.

Proposal

Currently, goods are taxed under multiple GST brackets – 5%, 12%, 18% and 28% – with some items subject to a higher compensation cess. The proposed overhaul aims to simplify this into mainly two slabs: 5% and 18%, with a special 40% “sin tax” on a limited set of goods like tobacco.

Cheaper Items Expected:

Daily-use goods – toothpaste, hair oil, umbrellas, utensils, processed foods, stationery (e.g., notebooks, geometry boxes).

Household appliances – sewing machines, pressure cookers, small washing machines.

Lifestyle/consumer goods – bicycles, readymade garments (₹1,000+), footwear (₹500–₹1,000).

Technology – mobile phones, computers.

Healthcare/essentials – vaccines, agricultural tools, ceramic tiles.

Vehicles

Passenger cars and two-wheelers will likely move from 28% GST (+ cess) to 18%, reducing prices by ~10%.

Electric vehicles remain at 5% with no cess.

Items under 18% slab:

Televisions, air conditioners, refrigerators, large washing machines, aerated water, cement, and ready-mix concrete.

Exclusions:

Petroleum products remain outside GST.

Luxury/“sin goods” (cigarettes, chewing tobacco, etc.) will still attract very high taxes through GST, cess, and NCCD.

Diamonds and precious stones will continue at current rates to protect labour-intensive exports.

Legal and Structural Basis

  • The power to fix and revise GST rates flows from Section 9(1) of the CGST Act, 2017 (levy of tax) read with Section 11 (exemptions in public interest) and relevant notifications such as 1/2017-Central Tax (Rate) and 2/2017-Central Tax (Rate), as amended from time to time.
  • The GST Council, constituted under Article 279A of the Constitution, recommends such rationalisations, and the Central/State Governments notify them through amendments.
  • Precedents show similar large-scale rationalisations done earlier through rate notifications and exemption notifications.

Expected Impact (Analysis)

  1. Revenue Neutrality Concern – Moving high-revenue-yielding items (e.g., automobiles, white goods) from 28% to 18% may cause an estimated ₹50,000 crore revenue loss.
    • However, Section 11(1) empowers exemptions/reductions if found necessary in the public interest.
    • The government expects this loss to be offset by higher consumption demand, increased sales volumes, and better compliance.
  2. Consumption Boost – Lower GST on daily essentials and vehicles is likely to push up consumer spending, in line with the objectives of Section 9 (broad-based levy) and the original vision of GST as a consumption-based tax.
  3. Simplification & Compliance – Fewer slabs will reduce disputes over classification (e.g., whether a product is 12% or 18%). This is consistent with the Council’s mandate to ensure a simple, uniform structure.
  4. Equity Considerations – Retaining a high “sin tax” on tobacco and similar goods aligns with public policy principles, ensuring that demerit goods remain heavily taxed without burdening mass consumption items.

Conclusion

The rationalisation is a major structural shift towards a two-rate GST system plus a sin tax slab. While it poses short-term revenue challenges, it is expected to spur consumption, reduce litigation, and make GST more business- and consumer-friendly. The final outcome will depend on the GST Council’s approval and notifications issued under Section 9 and Section 11 of the CGST Act.