The Group of Ministers (GoM) on rate rationalisation in its meeting on Thursday decided to take forward the Centre’s proposal for a dual rate structure under the goods and services tax (GST) to the GST Council, setting the stage for several goods to become cheaper. While calling it a common man friendly move, state ministers, however, took note of possible revenue losses and the need for further compensation to states.
Bihar Deputy Chief Minister Samrat Choudhary, who is the convenor of the GoM on rate rationalization, said the GoM has accepted the Centre’s proposal for two GST rates of 5% and 18% while scrapping the 12% and 28% slabs. A final call will be taken by the GST Council.
Doing away with the compensation cess, the Centre has also proposed a new rate of 40% with specific sin and ultra luxury goods in it. However, several states raised the issue of revenue loss and highlighted the need for continued compensation to states.
They have also sought an estimate from the Union Finance Ministry of the expected revenue loss from the rate rationalisation proposal.
West Bengal Finance Minister Chandrima Bhattacharya has also proposed a levy on top of the 40% GST rate on sin goods with a separate schedule in the GST Act to ensure that the current incidence of tax on these goods continues and is not reduced.
The GoMs are now unlikely to meet again, but officials of the Centre and the states are likely to meet and further finetune the proposals. While a date for the meeting of the GST Council has not been announced till now, it is likely to take place in New Delhi in late September.
The issue of revenue losses and the compensation cess has been a thorny one with states keen on continuing it to ensure that they do not face a shortage in revenue. The Centre has expressed hope that the boost to consumption and additional sales through the GST rate cuts would in the long term improve revenue collections under GST although it may lead to some short-term losses.
The Centre’s proposal on exempting health and life insurance policies for individuals have also been supported by states although it is estimated to lead to an annual revenue loss of Rs 9,700 crore.
Recently, an NIPFP working paper had revealed that several states have found it difficult to maintain the revenue share of goods and services tax (GST) in nominal GSDP after indirect taxes were subsumed into the GST in the base year of 2015-16. Analysts have also flagged potential revenue losses from the GST rate rationalization, pegging it at about Rs 1 lakh crore annually.
While welcoming the rate rationalisation, tax experts have also cautioned that it would need careful calibration to avoid inverted duty structures and strain on working capital of businesses.
An tax expert said that for these changes to truly deliver, a few critical areas need to be addressed. “The most immediate is the inverted duty structure which may arise on account of movement to lower tax slabs. If left unresolved from a supply chain perspective, it could create working capital strain and prevent the benefits of lower rates from reaching consumers,” he said, adding that the industry will expect the government to introduce transitional measures that protect distributors and branches.
Another tax expert said the proposed shift—moving most items from the 12% slab to 5% and from 28% to 18%—offers tangible relief for households and MSMEs, while aligning with the government’s broader goals of growth and financial inclusion. “At the same time, revenue neutrality and inflation risks will need careful balancing,” he said.
