PM Modi Unveils Comprehensive GST Reform Plans to Reduce Prices by Diwali

Prime Minister Narendra Modi has announced significant reforms in the Goods and Services Tax (GST) system, set to be implemented by Diwali. These changes aim to reduce prices of everyday items and address issues like compliance and litigation in the current tax structure. The existing GST rates will be replaced with two main tax slabs of 5% and 18%, plus a special 40% rate for certain demerit goods.

GST Reforms: Key Changes

Essential food items, medicines, and education will remain tax-free under the new GST regime. Most items currently taxed at 12% will move to the 5% bracket. Services will continue to be taxed at 18%, though insurance rates are yet to be clarified. Electronics like air conditioners, televisions, and refrigerators will benefit from a reduced rate of 18%, down from the current 28%.

A special 40% tax rate will apply to demerit goods such as tobacco, gutka, pan masala, and online gaming. However, how automobiles will be taxed remains unclear. Tobacco products will still face an overall tax incidence of 88%, with a separate levy introduced. Petroleum products like petrol and diesel will remain outside the GST framework.

Impact on Revenue and Compliance

The GST overhaul is expected to temporarily reduce revenue, currently around Rs 2.10 lakh crore monthly. However, increased consumption is anticipated to offset this loss within months. The finance ministry aims to simplify compliance by proposing a three-day GST registration process for small businesses and startups, along with pre-filled return filing.

The Union Finance Ministry outlined the GST revamp based on structural reforms, rate rationalisation, and ease of living. The indirect tax base has doubled since GST's implementation in July 2017, but revenue collection has only recently matched pre-GST levels due to rate cuts and pandemic impacts.

Addressing Structural Issues

The finance ministry plans to correct the inverted duty structure in sectors like textiles and fertilisers. This involves resolving classification issues to streamline rates, minimise disputes, and simplify compliance processes. Once implemented, the cess on luxury and sin goods will end as it was initially levied to compensate states for revenue loss during GST's first five years.

The proposed reforms have been shared with a group of ministers from various states for review before being presented to the GST Council for final approval in September. The changes aim to make essential goods more affordable and boost consumption across India.

The Prime Minister emphasised that these reforms would significantly reduce the tax burden on common items, benefiting both consumers and MSMEs. He stated that daily use items would become cheaper, strengthening the economy further.

In his Independence Day address, Modi promised a "double Diwali" with these reforms. He highlighted that over eight years, his government has undertaken major GST reforms after discussions with states to bring next-generation changes that reduce taxes nationwide.

With inputs from PTI