GST Rates Shake-Up: Government Proposes To Scrap 12%, 28% Rate Slabs, Eyes Two-Slab System| Profit Exclusive

The government has proposed the existing 12% and 28% slabs under the Goods and Services Tax structure as a part of its two-slab plan, according to people familiar with the matter.

About 99% of the of the items that are currently taxed at 12% will move to the 5% category while most goods taxed at 28%—including white goods— will move to the 18% category, the people told NDTV Profit, adding that the rejig is expected to be completed by December.

“The Centre is looking at all ongoing issues holistically and will propose a comprehensive package in the next GST Council meeting,” an official source said, adding that the proposal is not linked to US tariffs or geopolitical developments.

The proposal—aimed at rationalising tax rates—has been sent to the Group of Ministers (GoM) led by Bihar Deputy Chief Minister Samrat Chaudhary, official sources said.

Sources said that the decision it is just a proposal and the final decision will be taken after deliberations with all member states. Sources also indicate that the Centre is hopeful of implementing the rejig by December. The centre proposes to shift towards a two-slab structure in a move to streamline the current multi-rate system.

The centre also proposed a select list of five to seven items, such as tobacco and pan masala, that may fall under a new flat 40% sin goods bracket, maintaining higher tax incidence on demerit products. 

Meanwhile, some labour-intensive items will continue to enjoy concessional lower rates of 0.1%, 0.3%, or 0.5% to support employment-intensive sectors.

Sources added that the GST legislation caps tax rates at a maximum flat rate of 40%, which is why the government has kept demerit and sin goods within this upper limit. This ensures that while most items get lower rates, harmful products like tobacco remain highly taxed.

The development came hours after Prime Minister Narendra Modi—in his 79th Independence Day speech—announced a major revamp of the GST regime.

Calling GST as one of the most significant reforms since its introduction in 2017, Modi stressed the need for next-generation changes to provide relief to the common man, farmers, the middle class, and MSMEs.

GST At present it has a four-tier structure – 5%, 12%, 18% and 28%. The 18% tax bracket accounts for the largest share of GST revenue, contributing around 67% of collections, followed by the 28% slab, contributing about 14%. The 5% and 12% brackets contribute approximately 7% and 5%, respectively.

The proposed rejig, therefore, entails a major redistribution of items across slabs, aiming to reduce complexity while balancing revenue needs.

Officials acknowledge that the proposed rate rejig will lead to some revenue impact in the short term. However, they believe this will be offset by a boost in consumption and an expansion of the tax base due to improved compliance and greater formalisation.

“The structure is designed to stimulate demand while ensuring long-term revenue neutrality,” an official source said, noting that similar tax changes in the past have led to positive behavioural and economic outcomes.

On the compensation cess, government sources said the government expects to repay the GST compensation debt by December. Once the loan is fully repaid, the government cannot levy the compensation cess any longer as per the GST framework. However, officials indicated that the tax incidence of the cess will remain the same, though they did not elaborate on how this would be implemented post-cess removal.

Government sources also clarified that the proposal is not a response to recent US tariffs or broader geopolitical developments. “The Centre is looking at all ongoing GST matters holistically,” an official said, adding that this reform is part of a long-standing process. 

The rate rationalisation exercise has been underway since 2022, with multiple rounds of internal deliberations and inputs from states. The move is seen as particularly critical as the GST compensation cess regime is set to end.