How GST 2.0 will simplify taxes and drive consumption
What's the story
The Indian government is planning a major revamp of the Goods and Services Tax (GST) system. The proposed changes are expected to simplify tax classifications and reduce disputes over product tax rates. The GST 2.0 blueprint aims to streamline the existing tax structure, consolidating it into two main tiers: 5% rate for essential items and 18% rate for most other goods and services. The government also plans to introduce a special 40% rate specifically for luxury and sin products.
Tax simplification
Proposed GST revamp aims to eliminate quirky disputes
The proposed GST overhaul is aimed at simplifying the classification of goods and reducing quirky disputes. For instance, under the current system, packaged food items are taxed at 12%, while unpackaged ones attract a 5% tax. This has led to confusion among consumers. The new two-rate structure aims to eliminate such discrepancies by simplifying the classification of packaged and non-packaged food items, potentially moving toward a unified tax rate for essential items, but the exact categorization is currently unclear.
Auto sector impact
Major impact on automobile sector
The proposed GST revamp will also have a major impact on the automobile sector. Cars with smaller engines are likely to be moved from the current 28% slab to an 18% one. Higher-end models will be shifted to a 40% slab but would still have a lower overall tax burden once the compensation cess, which ranges between 17-22% on automobiles, is removed.
Expert opinion
Experts say proposed GST overhaul is right move
M. S. Mani, partner indirect taxes at Deloitte India, said, "The proposed GST overhaul is the right move." He added that businesses are optimistic about this reform package as it will end classification-related disputes and boost demand for goods and services. Karthik Mani from BDO India also said that the two-rate structure would reduce the possibility of a product being classified in headings with different tax rates, thereby reducing disputes.
Relief
GST 2.0 will benefit the middle-class
The rejig will likely push almost all items from 12% slab into 5%, while close to 90% of those taxed at 28% will migrate to 18% rate. Everyday essentials such as food, medicines, medical equipment, stationery, educational supplies, and personal care items will continue to be either exempt from tax or placed under the 5% slab. Goods commonly used by middle-class households, including air conditioners, refrigerators, and televisions, are likely to attract an 18% tax rate.