Business

IIE DIGITAL DESK : The 56th GST Council meeting, convened in New Delhi, centres on a sweeping proposal that could reshape indirect taxation across the country by sharply reducing rates on a large number of consumer and industrial items. The core idea put forward by the Centre and approved by a Group of Ministers (GoM) is to simplify the existing structure into a dual-rate regime — primarily 5 percent and 18 percent — while keeping a higher 40 percent slab for a handful of sin and demerit goods. If accepted, the move would reclassify many items now taxed at 28 percent down to 18 percent, and shift multiple goods from 12 percent to 5 percent, potentially lowering the average GST rate across the board and easing the tax burden for ordinary consumers.

Officials and state finance ministers speaking to the press emphasise the consumer-relief narrative: the proposed rationalisation is framed as a measure “in favour of the common man,” prioritising price relief over short-term revenue concerns. Government estimates circulated during discussions indicate that roughly 175 items could see a reduction in GST rates — a list spanning processed foods and staples to several household durables and electronics — which, proponents argue, would visibly reduce retail prices and spur demand. However, the scheme also carries fiscal implications; the shift of items from intermediate slabs to lower rates is projected to cause significant revenue loss for the Centre and states, with some estimates placing the annual shortfall around ₹80,000 crore. 

A central technical and political question before the Council is how to handle compensation to states for any revenue shortfall during the transition. The current compensation cess framework, introduced after GST’s rollout nearly a decade ago, is due for reconsideration: discussions include whether to extend, taper, or wind down the cess and how to structure transfers to protect state finances while achieving tax simplification goals. Several state representatives have signalled cautious support for the reforms, provided adequate safeguards and a clear fiscal glidepath are agreed. 

Beyond headline rate changes, the Council will also examine detailed sectoral implications and administrative tweaks needed for implementation. Tractors, certain automobiles, processed foods such as ghee, butter, pickles and ready-to-eat items, and consumer durables like air conditioners and refrigerators are among the categories flagged for reclassification; each carries its own demand elasticity and revenue profile, making the final package a careful balancing act between political acceptability and fiscal prudence. The Finance Ministry and tax administration will need to prepare tariff schedules, IT-system updates and public guidance to prevent market confusion at rollout. 

The reform would mark the most significant rate rationalisation since GST’s inception and could be the “next generation” GST reform promised by the Prime Minister. Successful implementation would require coordinated Centre–state consensus on compensation mechanics, a clear timetable for rate migration, and readiness on compliance and invoicing systems to ensure that reduced statutory rates translate quickly into lower retail prices rather than temporary margin adjustments by suppliers. The 56th meeting therefore has the potential both to deliver consumer relief and to trigger a delicate fiscal negotiation among India’s fiscal partners.