What is the 'Next Gen GST' and How Will It Transform India's Tax System?

Introduction to the Next Gen GST

New Delhi: The government is proposing a transformative 'Next Gen GST' aimed at reforming the current tax structure by introducing lower rates and simplifying it to just two slabs. This initiative is designed to stimulate the economy amidst tariff challenges and is expected to pave the way for a unified tax rate as India progresses towards becoming a developed nation.

According to government insiders, the new GST framework will reduce tax rates significantly, establishing only two categories: 5% and 18%. This change is intended to enhance economic growth and alleviate tariff pressures.

If the GST Council approves this two-slab system, it will replace the existing four-tier structure, eliminating the 12% and 28% tax brackets.

A government representative described this initiative as a 'game-changing reform' in India's economic landscape, emphasizing its significance.

Sources indicate that the new tax structure will likely shift most everyday items into the lower tax category, resulting in price reductions that could encourage consumer spending.

Dubbed the 'reformed and refined GST', officials noted that the government seeks a long-term solution for tax rate adjustments, especially with the impending end of the Compensation Cess, making the Next Gen GST essential.

"Lower taxes will increase disposable income for consumers, leading to heightened consumption," stated an official.

The proposed tax rates of 5% for essential goods and 18% for standard items, along with a 40% rate for luxury goods, represent a comprehensive effort to stabilize tax rates, according to officials.

After extensive discussions over six months, the proposed changes aim to prevent future demands for tax adjustments and avoid the accumulation of input tax credits (ITC).

Once the Group of Ministers (GoM) endorses the proposal and it receives approval from the GST Council, it will eliminate the current uncertainty surrounding tax rates and ensure consistency.

"The Next Gen GST is designed with the needs of the middle class, farmers, and small businesses in mind, ensuring lower taxes on daily necessities," the official explained.

The ultimate goal is to transition to a single tax rate once India achieves developed nation status, as such a structure is more suitable for countries with uniform income and spending capabilities.

During this overhaul, the government has meticulously reviewed each item, ensuring thorough discussions on various goods, from agricultural products to educational supplies, categorizing them appropriately.

Approximately 99% of items currently taxed at 12%, including butter and fruit juices, would shift to the 5% rate. Additionally, many electronic goods and construction materials would transition from the 28% to the 18% slab.

This proposal follows recent tariff increases imposed by the US on Indian exports, which could affect around $40 billion worth of goods, including textiles and jewelry.

In his recent Independence Day speech, Prime Minister Narendra Modi highlighted the importance of self-reliance and promoting domestic consumption.

The proposed tax changes will be reviewed by a group of ministers from various states before being presented to the GST Council, which is expected to convene next month to discuss the reforms.

Currently, about 20% of items, such as packaged foods and clothing, are taxed at 12% GST, contributing to a small percentage of overall consumption and revenue.

While moving these items to a lower tax bracket may result in revenue loss, the government remains optimistic that increased consumption will compensate for any shortfall in the coming months.