Overview of Next-Gen GST
The Indian government is planning a Next-Gen GST reform, aiming to simplify the current multi-slab system and move closer to a single tax rate in the long term. Currently, around 20% of items—including packaged food, beverages, apparel, and hotel accommodation—are taxed at 12% GST, contributing 5–6% of GST revenue.
The proposed system would introduce just two main tax slabs: 5% and 18%, replacing the existing four slabs and eliminating the 12% and 28% rates. Government sources say this reform is expected to boost consumption, stabilize tax rates, and mitigate external tariff threats.
Benefits of the Two-Slab System
Officials describe the Next-Gen GST as a “game-changer” among India’s economic reforms. By moving most common-use items to the lower 5% slab, the government anticipates price reductions, leading to increased consumer spending. The reformed GST is designed to be long-term and sustainable, particularly with the Compensation Cess coming to an end.
Proposed Tax Rates and Structure
- Merit and standard goods: 5% and 18%
- Sin goods (e.g., tobacco, luxury items): 40%
The government has undertaken a comprehensive review of all items, ensuring fairness for the middle class, farmers, and MSMEs. For example, 99% of items in the current 12% category, such as butter, fruit juices, and dry fruits, would move to 5%. Similarly, 90% of items currently at 28%, including electronics like ACs, TVs, and fridges, as well as cement, will shift to 18%.
Economic Rationale and Impact
The two-slab GST is expected to encourage consumption and counter potential revenue losses from lowering rates. Government officials argue that lower taxes put more money in people’s pockets, ultimately boosting demand.
The reform also comes in the backdrop of US tariffs on Indian exports, which threaten sectors like gems, jewellery, textiles, and footwear. By rationalizing domestic tax rates, India aims to strengthen its internal market in line with Prime Minister Narendra Modi’s call for self-reliance and “Make in India” consumption.
Next Steps for Approval
The proposal will first be reviewed by a Group of Ministers (GoM) from different states before being placed before the GST Council, headed by the Union Finance Minister. The council is expected to deliberate on the reforms next month, potentially finalizing the new GST structure.
Conclusion
Next-Gen GST represents a major step toward a simplified, efficient tax system in India. While the single-slab structure is not immediately feasible, the 5% and 18% rates are designed to benefit consumers, farmers, MSMEs, and the broader economy, while ensuring long-term stability in taxation.