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

The Centre has proposed a two-slab GST structure that could bring widespread relief to consumers and streamline indirect taxation in a move that could be the most significant overhaul of the Goods and Services Tax regime since its rollout in 2017. The proposal—aimed at rationalising tax rates—has been sent to the Group of Ministers led by Bihar Deputy Chief Minister Samrat Chaudhary, official sources said.

As per the Centre’s proposal, the existing 12% and 28% GST slabs will be scrapped entirely. In their place, a simplified structure is being mooted while retaining the 5% and 18% tax slabs.

Under the proposal, 99% of items currently taxed at 12% may shift to the 5% slab, substantially reducing the tax burden on a wide range of goods and services, including many mass consumption and essential items such as edible oil, toothbrushes, and other daily essentials, which will either be exempted or moved to the 5% bracket.

Most items in the 28% category, including white goods, could move to the 18% slab, potentially lowering prices for aspirational and durable consumer goods.

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 a 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 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.

At present 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.

Sources also indicate that the Centre is hopeful of implementing the rejig by the third quarter of the current financial year, aligning with Prime Minister Narendra Modi’s Independence Day statement promising Diwali Gift in the form of GST reform and lower tax burden.

If approved, the new structure could significantly ease the tax burden on consumers, simplify compliance for businesses, and further stabilise GST revenues over time.

Government sources have also clarified that there is no proposal at present to bring petrol and diesel under the GST net, keeping fuel taxation outside the GST framework for now.

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, official added. The move is seen as particularly critical as the GST compensation cess regime is set to end.

The proposal has now been formally placed before the Group of Ministers for consideration. A meeting of the GST Council is likely in September or October, where the GoM’s report and the Centre’s proposals will be taken up for discussion and possible adoption.

Importantly, officials stress that the final decision will rest with the GST Council, where both centre and states have a decisive role. Any structural changes to the GST framework require Council consensus.

On the compensation cess, government sources said the government expects to repay the GST compensation debt by Q3. 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.