GST Council Begins Two-Day Session; Centre Pushes Major Tax Overhaul

The two-day meeting of the Goods and Services Tax (GST) Council opened today with the Centre expected to push for a sweeping overhaul of the tax structure, including a 5 per cent GST rate on electric vehicles (EVs). The reforms aim to simplify the system, ease compliance, and lower prices of essential goods ranging from food products to electronics.

Chaired by Union Finance Minister Nirmala Sitharaman and comprising state finance ministers, the Council will deliberate on the proposals, with final decisions expected at the conclusion of the session on September 4.

From Four Slabs to Two

The Centre has proposed collapsing the existing four-tier structure of 5, 12, 18, and 28 per cent into just two slabs—5 per cent and 18 per cent—while introducing a special 40 per cent rate for luxury and demerit goods. This change, government officials argue, would make the GST regime more transparent and consumer-friendly.

The current system, introduced on July 1, 2017, replaced multiple state and central levies such as excise duty and VAT. To cushion states against revenue loss, a compensation cess was imposed, though this mechanism formally ended in June 2022.

Prime Minister Narendra Modi had flagged the need for reform in his Independence Day address on August 15, with the Centre later circulating a blueprint that received broad endorsement from a Group of Ministers (GoM).

Spotlight on EV Taxation

One of the most contentious issues is EV taxation. The GoM recommended an 18 per cent GST on EVs priced up to ₹40 lakh, while the Centre is advocating a lower 5 per cent rate to accelerate adoption and support the green transition. This divergence is expected to dominate the Council’s deliberations.

What May Get Cheaper

Several daily-use items are likely to move to the lower 5 per cent slab, including ghee, nuts, drinking water (20-litre packs), namkeen, medicines, footwear, apparel, pencils, umbrellas, bicycles, and hairpins.

Electronics such as televisions, washing machines, and refrigerators may shift from 28 per cent to 18 per cent, easing consumer prices. Automobiles are expected to face differential taxation: entry-level cars at 18 per cent, while SUVs and luxury models fall under the proposed 40 per cent slab. Tobacco, pan masala, and cigarettes would also be taxed at 40 per cent, with provisions for additional levies.

Opposition States Seek Compensation

Eight opposition-ruled states—Himachal Pradesh, Jharkhand, Karnataka, Kerala, Punjab, Tamil Nadu, Telangana, and West Bengal—have demanded compensation for potential revenue losses arising from the rate cuts. They argue that collections will decline, while the Centre maintains that higher consumption driven by lower prices will offset the impact.

The Council may also consider ending the compensation cess earlier than scheduled, possibly by October 31. Though the cess is officially slated to continue until March 31, 2026, sources indicate discussions are underway to wind it down ahead of schedule, as loans raised during the Covid-19 period to cover states’ shortfalls near repayment. An early halt could leave a surplus of ₹2,000–3,000 crore, which may be shared equally between the Centre and the states.

A short-term compensation mechanism for states is also under discussion, though the existing cess framework is unlikely to be extended.

Balancing Reform and Revenue

The GST (Compensation to States) Act, 2017 had guaranteed states a 14 per cent annual revenue growth over five years based on 2015–16 levels. That legal framework ended in June 2022, though the cess was extended until 2026 for debt servicing.

Government sources stress that the proposed reform has been designed to minimise revenue disruption while reducing the compliance burden on businesses and delivering lower costs for consumers.