GST rate rationalisation hopes rise; brokerages optimistic of significant changes when council meets

With the dates for the next Goods & Services Tax (GST) Council meeting expected to be announced soon, hopes that the much-awaited rate rationalisation exercise will be taken up—and many proposals passed – is rising. Brokerages and experts are pencilling in an opportunity for significant changes to not only the rates but also the GST structure itself.

Sources are now indicating that the GST Council may meet only at the end of August; meanwhile, brokerage firm Jefferies believes there is a high probability that a wide range of large consumption items are ripe for lower rates. It cites health insurance and term life insurance premiums as two such items. Others include cement, which is currently taxed at 28%, while other building materials like paints are taxed at a lower rate. Jefferies argues that the possibility to cut GST on cement from 28% to 18% exists.

“Significant items with demand for rate cuts include Hybrid PVs (taxed the same as ICE vehicles), life insurance premiums and telecom services (both 18%). government may also consider shifting the 12% GST rate items to 5% or 18% with potential beneficiaries of lower rates including processed foods, footwear & apparel,” its note says.

Japanese brokerage firm Nomura, meanwhile, makes a case for some rate equalisation in the consumer durable space. “ACs is the only category (apart from >32” TVs) which is taxed at 28%. Therefore, any potential reduction in the tax rates should benefit the demand for ACs as well, especially given the upcoming BEE norms (from Jan-26), which raise the cost by 3-5% and happens every few years,” it says in its note.

Tractors are another category brokerages believe are prime for a rate reduction from the current 12% to 5%, making tractors more affordable and aiding demand, crucial for an economy that is still largely agrarian. It won’t hurt tractor-makers either, Nomura argues: “While companies are likely to pass on most of the tax reduction to the end consumer, it nevertheless improves their pricing power and operating leverage.”

Another major structural change that is being spoken about is the inclusion of new items into the GST umbrella. Natural gas is one such. Oil & Gas Minister Hardeep Puri has spoken on the central government’s desire and push to include the commodity under the tax. He is quoted as having said in January, “There are a large number of states that earlier had reservations, like Gujarat, Maharashtra and Madhya Pradesh. But they are more or less seeing the benefits of it.”

Morgan Stanley believes that if implemented, “the entire gas value chain stands to benefit from a lower tax rate, which coincides with the global gas glut and growing last-mile connectivity of gas infrastructure.”

GST: TIME FOR A RATE CHANGE

Brokerage Expectations

All this, combined with the rising supposition that the government is working towards bringing the number of tax slabs under GST down from the current 5-tax rate structure (0%, 5%, 12%, 18%, and 28%) also has experts sitting up. Nomura says, “While the 5% and 18% slabs capture essential and discretionary items, respectively, the 12% slab has long been seen as an administrative complication that adds marginal differentiation without any significant revenue advantage.” The 12% slab currently includes items like packaged foods, household goods a la furniture and sewing machines, and medical supplies such as bandages.

But experts also caution against acting in haste. An tax expert says, “GST rate rationalization is a pivotal step towards achieving a more streamlined and simplified tax structure, in line with global best practices. However, given the unique complexities of the Indian economic landscape, it is essential to strike a careful balance—one that spurs demand, keeps inflation in check while also safeguarding overall revenue neutrality… the implications on specific sectors, such as railway and wind energy, warrant closer examination as they were previously shifted to the 12% GST bracket to address inverted duty structure related issues.”

“The forthcoming GST rate rationalisation is poised to be a truly pivotal step by the government, we anticipate movement of everyday products from the 12% to the 5% bracket, making essential goods more affordable for the masses. Similarly, we expect a strategic shift for certain goods from 28% to 18%, reflecting a move towards a more rationalised structure. We also expect focused rationalization for critical sectors such as agriculture, medical supplies, and transportation—areas that are absolutely fundamental to the nation’s sustained growth and overall well-being. This rationalisation, if implemented as anticipated, serves as a strong indicator of the increased tax base and the highly effective administration by the Indian tax authorities, which has consistently led to a significant and encouraging increase in GST collections over the past period, Another tax expert says.

Another tax expert also views rate rationalisation as an exercise bringing relief for consumers, “From a consumer standpoint, there’s a compelling need to revisit the current GST rate structure. For instance, solar renewable energy devices—such as solar water heaters and solar-powered lighting systems—are currently taxed at 12%, as are basic packaged food items like fruit pulp, ready-to-eat meals, and frozen vegetables. These could be reasonably moved to the 5% slab, highly processed and non-essential snack foods—such as flavoured chips, cheese balls, and packaged nachos—are taxed at 12%. Despite offering little nutritional value; these could be shifted to the 18% slab to align with public health objectives and discourage unhealthy consumption habits. Several items currently under the 18% slab—like mobile phones, refrigerators, and health insurance premiums—are no longer luxury products. 28% slab, originally meant for luxury and sin goods, also deserves a closer look. Items like air conditioners and two-wheelers—especially scooters and motorcycles—should be brought down to 18% or below. Meanwhile, ultra-luxury goods like private jets and yachts, which currently attract 28% or more including cess, can continue to be taxed at the highest rates,” he added.

However, it is prudent to note that the dates for the next meeting have not yet been announced, though hope is that the council may meet now in August. The GoM on rate rationalisation is also still learnt to be compiling its recommendations, and the final agenda of the council meeting will be decided only after all the blocks are in place.

Source from: https://www.cnbctv18.com/economy/gst-rate-rationalisation-hopes-rise-brokerages-optimistic-of-significant-changes-when-council-meets-19639507.htm