Next-Gen GST Reforms to Take Effect from September 22

General Studies Paper-3

Context

• The GST Council has simplified the existing four-tier system (5%, 12%, 18%, and 28%) into a two-slab structure:
• 5% – for essential goods
• 18% – for most standard goods and services
• Additionally, a new 40% slab is introduced to tax sin and luxury items.

More About the News

• 0% GST on vital goods/services: Basic food items, health and life insurance, educational materials, select medical devices.
• 33 life-saving drugs + 3 key cancer medicines have zero GST.

Benefits of Key Changes

• For Consumers: Lower living costs and improved access to healthcare and education due to reduced or zero GST.
• For Businesses: Fewer slabs mean less confusion and classification disputes, promoting easier compliance.
  • Lower GST rates for autos, durables, FMCG stimulate demand and encourage formalization of smaller enterprises.
• For Economy & Government: CPI inflation down by ~1.1 percentage points projected by experts, easing household budgets.
  • Demand stimulus coincides with the festive season to energize consumption.
  • A predictable regime strengthens the investment climate.

Key Challenges

• Government Revenue: ₹48,000 crore ($5.5 billion) expected short-term fiscal loss that may stress fiscal consolidation aims.
• Centre–State Tensions: Compensation worries and disputes over revenue-sharing could arise.
• Removal of Input Tax Credit (ITC): Certain sectors like healthcare products and insurance are exempted from GST. Exemption means businesses cannot claim ITC, leading to cascading taxes (tax on tax) and higher hidden costs in the supply chain.
  • Uncertainty over National Anti-Profiteering Authority (NAA): The NAA was set up to ensure businesses passed on GST rate cuts to consumers.
  • Initially meant for 2 years (extendable by GST Council), but uncertainty over revival or replacement creates gaps in monitoring profiteering.
• Sectoral Unevenness: Luxury taxed at 40% could spur illicit markets; mid-tier industries (textiles, construction) concern at 18%.
• Transitional Issues: Re-labeling MRPs on old stock risks wastage of packaging materials.