The 56th GST Council met on Wednesday under Finance Minister Nirmala Sitharaman to discuss a major reform of India’s tax system. The plan could make everyday items and electronics more affordable, while imposing higher taxes on luxury and sin goods.

The government’s ‘next-gen’ GST proposal seeks to reduce the current four-tier system into just two tax slabs 

5% and 18%. The existing 12% and 28% rates, introduced in 2017, would be eliminated.

This change would shift nearly all items in the 12% slab, and many products currently taxed at 28%, to lower rates, potentially cutting prices for a wide range of consumer goods.

Items such as ghee, nuts, large packaged drinking water, non-carbonated drinks, namkeen, medicines, and medical devices could move to the 5% category.

Other household products like pencils, bicycles, umbrellas, and hairpins may also become less expensive due to the tax reduction.

Electronic appliances like televisions, washing machines, and refrigerators, currently taxed at 28%, may fall under the 18% slab, making them more affordable for buyers.

While most goods will get a tax cut, the government is considering a 40% GST for luxury and sin goods. This could include premium cars, SUVs, tobacco products, pan masala, and cigarettes.

For electric vehicles (EVs), the plan is to levy 5% GST to encourage adoption. Discussions are ongoing about higher taxes for premium EV models to differentiate them from more affordable options.

Several opposition-ruled states like West Bengal, Kerala, Tamil Nadu, Punjab, Telangana, Karnataka, Himachal Pradesh, and Jharkhand have expressed concerns about potential losses in revenue.

They have requested a clear compensation mechanism. Previously, the Centre had promised to compensate states for GST-related revenue losses for five years using a cess on luxury and demerit goods. That system ended in June 2022, and states now want any extra funds from the 40% slab to be allocated to them.

The proposed GST reform follows Prime Minister Narendra Modi’s Independence Day announcement about tax changes aimed at simplifying the system and boosting consumption.

The Group of Ministers (GoM) has approved the plan in principle, and the GST Council will formally review it on September 3 and 4.

If implemented, the changes could make essentials and electronics cheaper while increasing taxes on luxury and sin goods, marking one of the largest GST revisions since its introduction.

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