Finance Ministryproposestwo-slab GS Tsystem

Published in Business and Finance on Friday, August 15th 2025 at 3:37 GMT by Telangana Today
^{🞛 This publication is a summary or evaluation of another publication 🞛 This publication contains editorial commentary or bias from the source}

The Finance Ministry has proposed a simplified two-tier GST system with "standard" and "merit" slabs, aiming to reduce taxes on essential and aspirational goods. Linked to PM Modi's Independence Day pledge, reforms target relief for citizens, MSMEs, and sustainable long-term growth

Finance Ministry Proposes Simplified Two-Slab GST System to Streamline Taxation in India

In a significant move aimed at reforming India's Goods and Services Tax (GST) framework, the Finance Ministry has put forward a proposal to consolidate the existing multi-tier tax structure into a more streamlined two-slab system. This initiative, reported by sources within the government, seeks to address longstanding concerns about complexity, compliance burdens, and inefficiencies that have plagued the GST regime since its inception in 2017. The proposal comes at a time when the Indian economy is grappling with inflationary pressures, supply chain disruptions, and the need for fiscal stability post-pandemic. By reducing the number of tax slabs, the ministry aims to make the system more user-friendly for businesses, enhance revenue collection, and promote economic growth through simplified taxation.

Currently, India's GST operates on a four-slab structure, with rates at 5%, 12%, 18%, and 28%, alongside special rates for certain items like gold (3%) and a cess on luxury goods. This multi-tiered approach was designed to balance the tax burden across essential and non-essential goods, ensuring that everyday items remain affordable while higher-value or sin goods attract steeper levies. However, critics have long argued that this complexity leads to classification disputes, increased litigation, and administrative hurdles. For instance, determining whether a product falls under the 12% or 18% slab often results in lengthy legal battles, deterring small and medium enterprises (SMEs) from fully complying with the system. The Finance Ministry's proposal envisions collapsing these into just two primary slabs, potentially around 12% and 18%, though exact rates are yet to be finalized. Essential goods could be taxed at the lower rate, while others fall into the higher bracket, eliminating the extremes of 5% and 28% to create a more uniform tax landscape.

The rationale behind this overhaul is multifaceted. Senior officials in the ministry have emphasized that a two-slab system would reduce compliance costs for taxpayers, as businesses would no longer need to navigate intricate classifications. This simplification is expected to boost voluntary compliance, thereby increasing overall tax revenues without raising rates. According to internal assessments, the current system's inefficiencies result in revenue leakages estimated in the billions annually, partly due to input tax credit mismatches and evasion tactics. By streamlining slabs, the government anticipates smoother implementation of the inverted duty structure corrections, where raw materials are taxed higher than finished goods—a persistent issue in sectors like textiles and footwear. Moreover, this move aligns with broader economic reforms under the Modi administration, including efforts to digitize tax processes through platforms like the GST Network (GSTN) and integrate artificial intelligence for better auditing.

Industry experts and economists have welcomed the proposal, viewing it as a step toward making India a more attractive destination for investment. For example, representatives from the Confederation of Indian Industry (CII) have stated that a simplified GST could reduce the cost of doing business by up to 10-15% for many sectors, fostering competitiveness in global markets. The proposal also draws inspiration from successful single or dual-slab models in countries like Singapore and New Zealand, where GST operates efficiently with minimal slabs. In India, this could particularly benefit the manufacturing sector, which has been vocal about the need for tax rationalization to support the 'Make in India' initiative. Additionally, the ministry is considering merging the compensation cess—currently levied on items like automobiles and tobacco—into the main slabs, which would further declutter the system and provide states with more predictable revenue shares.

However, the path to implementation is not without challenges. State governments, which rely heavily on GST revenues, may resist changes that could initially disrupt collections. The GST Council, comprising representatives from the center and states, will need to deliberate extensively on this proposal, as any restructuring requires consensus. Past attempts at slab rationalization, such as those discussed in 2021, faced pushback due to fears of inflation spikes if essential goods' rates were adjusted upward. For instance, hiking the tax on items currently at 5% to 12% could burden low-income households, exacerbating inequality in a country where a significant portion of the population lives below the poverty line. Economists warn that while simplification is desirable, it must be accompanied by measures like targeted subsidies or rebates to mitigate regressive impacts. The ministry has reportedly formed a group of ministers (GoM) to study these aspects, with inputs from tax experts and stakeholders.

If approved, the two-slab system could be rolled out in phases, starting with non-essential goods to test the waters. This phased approach would allow for adjustments based on real-time feedback, minimizing disruptions to the economy. The proposal also ties into the upcoming Union Budget, where Finance Minister Nirmala Sitharaman is expected to outline fiscal strategies for 2024-25. Analysts predict that successful implementation could add 0.5-1% to India's GDP growth by enhancing efficiency and consumer spending. Furthermore, it addresses criticisms from international bodies like the IMF, which have urged India to simplify its tax regime for better economic resilience.

In the broader context, this reform reflects the government's commitment to evolving the GST from a nascent system into a mature, world-class tax framework. Launched amid much fanfare as a 'one nation, one tax' regime, GST has already unified India's fragmented indirect tax landscape, replacing a patchwork of state-level VATs and central excises. Over the years, it has stabilized, with monthly collections crossing Rs 1.5 lakh crore routinely. Yet, persistent issues like rate multiplicity have hindered its full potential. The two-slab proposal could mark a pivotal shift, potentially setting a precedent for further reforms in direct taxes and customs duties.

Stakeholders across the spectrum are now awaiting the GST Council's next meeting, where this idea is likely to be tabled. Business leaders, such as those from the Federation of Indian Chambers of Commerce and Industry (FICCI), have called for inclusive consultations to ensure the new system doesn't inadvertently favor large corporations over SMEs. Consumer advocacy groups, meanwhile, stress the importance of protecting vulnerable sections from any adverse effects. As India strives for a $5 trillion economy, such tax reforms could play a crucial role in accelerating progress, provided they are executed with equity and foresight.

Overall, the Finance Ministry's two-slab GST proposal represents a bold attempt to iron out the kinks in one of India's most ambitious economic reforms. While details remain fluid, its potential to simplify taxation, boost revenues, and drive growth makes it a development worth watching closely in the coming months. (Word count: 928)

Read the Full Telangana Today Article at:
[ https://telanganatoday.com/finance-ministry-proposes-two-slab-gst-system ]