The proposed revision of the Goods and Services Tax (GST) slabs structure may not raise the weighted average levy, but is likely to keep the tax incidence on “demerit and luxury goods” at roughly the currently levels.
While the compensation cess applied on these goods is likely to be dispensed with, effective FY27, other imposts like health or clean energy cess may be applied on them, sources said.
A proposal under consideration among official circles is to raise the tax rate on these items, which range from tobacco products and aerated drinks to cars, from 26% at present, subject to a 40% rate cap mandated under the GST Act.
Currently, the tax incidence on these items due to the combined effect of the 28% slab rate, and the compensation cess, ranges between 29-50%. The need for a hike the GST rate on the demerit and luxury goods arises, as the removal of the compensation cess will otherwise reduce the tax incidence on them. The other cesses that are being considered will be of lesser magnitude compared to the compensation levy.
According to the sources, the GST Council is expected to meet in June-July with a heavy agenda to discuss the much-awaited rate rationalisation/simplification, and the future of the compensation cess. The objective is to ensure that consumers, government, and industry benefit from the cessation of the compensation cess and the rate rationalisation process.
There are four major GST slabs at present– 5%, 12%, 18% and 28%. The central and state GST officers are currently deliberating a reduction in the number of slabs to two, possibly by abolishing the 12% slab. Several goods, including some food items, could move to 5% slab, if the 12% rate is done away with, while some could shift to the higher slab of 18%.
Of gross GST revenues, 18% slab contributes around 65%, followed by 28% slab (16%), 5% (10%) and 12% slabs (18%). The balance 1% comes from other the special rates being applied on rate for gold, jewellery and precious stones.
The sources said discussions are going on whether to increase the 28% slab rate to 35% or 40% after the compensation cess comes to an end, latest by March 2026.
Sources said various panels on rate rationalisation are discussing the options, with inputs from industry. No final view has been taken by them on GST rates, slabs and the future of compensation cess. The way forward on cess will be decided once a consensus is worked out on tax rates and slab restructuring, the sources added.
The clean energy cess, which was introduced in 2010, is applied on coal at a rate of Rs 400 per tonne. This cess was renamed to clean environment cess and was later merged into the GST cess meant to compensate the states for GST revenue losses. Currently, health and education cess are payable at 4% on income tax.
The clean energy cess and health cess, if collected, could be channelised for welfare programmes to be implemented. The GoM on GST rates rationalisation, headed by Bihar deputy chief minister Samrat Chaudhary, submitted in December 2024.
In the next Council meeting, on the table would also be a proposal to reduce the health and life insurance tax rate to 5% from 18% while retaining the input tax credit.
“While insurance companies are keen on a lower rate of 5% with full ITC on health cover and term plans, the auto sector would be awaiting a confirmation on the cessation of the compensation cess on automobiles from April 1, 202,” an tax expert said.
Businesses would expect that the rate rationalisation committees’ report should lead to a reduction in the number of rate slabs, which will simply GST, he said.
The GoM on compensation cess, headed by Minister of State for Finance Pankaj Chaudhary, is looking into the future of the levy beyond March 2026. As of now, the cess is being levied on luxury and sin goods but is being utilised only for paying back loans taken during the Covid period to bridge the cess kitty in the initial five years of GST when the states enjoyed a revenue guarantee. As per calculations, the interest and principal of the Rs 2.69 lakh crore loan would be repaid by January 2026. The collection from the compensation cess in February and March 2026, estimated to be Rs 40,000 crore, could be distributed equally between the Centre and states.
Source from: https://www.financialexpress.com/business/industry/gst-on-sin-goods-cars-may-go-up/3880704/
