Big decisions likely in GST Council meeting today, changes in tax slabs likely

What We Know So Far

The GST Council meeting brings together the union and state finance ministers for a singular agenda of GST reforms, including rate rationalisation, simpler compliance, and potential new compensation mechanisms. An officers’ meeting was held on Tuesday to lay the groundwork before the council meets.

A two-slab structure is being proposed—5% for essential goods and 18% for non-essentials— from four slabs of 5%, 12%, 18% and 28% at present. An additional slab of 40% is likely for so-called “sin goods” like tobacco and cars priced ₹50 lakh and above.

The fitment panel has already approved moving to this two-tier structure.

Top 10 items likely to Get GST rate cuts

According to Reuters, India is planning to cut GST by at least 10 percentage points on nearly 175 items but there are a few revisions that the common man is looking forward to in particular.

GST on essential items—toothpaste, shampoo, talcum powder, soaps—are now likely to be in the 5% bracket from 18% earlier. GST on butter and cheese, as well as ready-to-eat foods (pickles, snacks, chutney, etc.) may also come down to 5% from 12% and 18% now.

Broadly, nearly all food and textile items will come under the 5% slab, in what can be seen as a boost to the likes of Hindustan Unilever Ltd., Godrej Consumer Ltd. and Nestle India Ltd.

What’s more interesting is the 18% slab, which will now include consumer electronics such as TVs, ACs, refrigerators and washing machines. These so-called white goods attracted 28% so far. Even the GST on cement will reduce to 18% from 28% at present.

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GST on Auto

While small petrol cars of engine size up to 1,200 cc are likely to attract 18% GST from 28% at present, Reuters claims this benefit will be extended to small hybrid cars as well. That’s a big plus for Maruti Suzuki India Ltd., and by extension Toyota India, but a small hiccup for electric car makers Tata Motors Ltd. and Mahindra & Mahindra Ltd.

That hiccup may become hard to swallow if the GST Council decides to increase the tax on ₹20-40 lakh electric cars to 18% from 5% at present, according to a Reuters report. An even higher tax is proposed for luxury electric cars by the likes of Tesla Inc. and BYD Co.

Additionally, the GST Council is likely to give in to a longstanding demand of the two-wheeler industry to reduce the GST rate to 18% from 28% at present. That’s an immediate boost for Hero MotoCorp Ltd. reeling under flagging sales of its commuter motorcycles.

But there’s a proviso. The GST Council may just choose to define what are luxury two-wheelers in India. According to people familiar with the matter, the GST Council is likely to propose 40% tax on two-wheelers with engine capacity higher than 350 cc. Bajaj Auto and Royal Enfield— the biggest players in the middleweight segment—have pushed back against such a move.

ALSO READ | Why GST reforms are a big plus for small cars but not so much for luxury

What GST rationalisation may look like

1. Structural simplification: Four slabs (5%, 12%, 18%, 28%) consolidated into effectively two (5% and 18%) plus a special 40% for luxury/sin goods.
2. Enhanced Ease of Doing Business: With fewer categories, compliance becomes simpler, litigation reduces, and administration streamlines.
3. Revenue Neutrality: The 40% slab on sin/luxury items aims to offset losses from lower slabs.
4. Compensation mechanisms: A cess surplus ( ₹40,000-50,000 crore) is considered for compensating states, with a phaseout by 31 October. The insurance sector has proposed exemptions and wants rate benefits passed to policyholders.
5. Mitigating duty inversion: There’s awareness of inverted duty structure—where input services are taxed higher than outputs. Discussions are expected on aligning input and output rates to ensure consumers benefit.

Why GST reforms, though?

Prime Minister Narendra Modi, during his Independence Day speech on 15 August, announced India’s biggest indirect tax overhaul since July 2017, when Goods and Services Tax first came into effect. India’s stock market went on a tear in the days that followed, only to reverse gains less than two weeks later when 50% US tariffs on India came into effect.

In essence, the GST reforms are a cushion to the blow that the Indian economy would take due to Trump’s tariff tirades over New Delhi’s purchase of Russian oil.

According to SBI Research, GST reforms alone can add 60 basis points to India’s GDP print over the next 12 months, as against US tariffs that can dent growth by up to 1 percentage point over time, Reuters reported on 21 August citing an MUFG analysis.

One basis point is one-hundredth of a percentage point.

“If the Council delivers a broad 12% to 5% migration plus a rational 28% to 18%/40% split, then the GST reforms can offset roughly half to nearly all of the likely US tariff drag,” Soumya Kanti Ghosh, group chief economic advisor at State Bank of India, said in SBI Research’s ‘GST 2.0’ report released on 19 August. “If tariffs are harsher/longer, then the drag could approach 1 ppt—GST helps, but won’t fully erase it in that case.”

SBI expects the weighted average GST rate to fall to 9.5%, easing retail inflation by 20-25 basis points and lifting consumption. That, in turn, feeds into higher monthly GST collections.

Revenue hit due to GST reforms

While IDFC First Bank pegs the revenue loss at ₹1.65-1.70 lakh crore, SBI Research pencils in ₹60,000 crore to ₹1.1 lakh crore revenue hit if GST 2.0 moves to a two-tier structure (5% and 18%) with a 40% “sin/luxury” band.

Of this amount, ₹45,000 crore can be neutralised by using the projected ₹45,581 crore surplus in GST Compensation Cess fund by March 2026, SBI argues, but even without that, the consumption boost could recoup revenues.