The 56th GST Council meeting has commenced in New Delhi, chaired by Union Finance Minister Nirmala Sitharaman, with ministers from all states participating. This two-day session is particularly crucial as it seeks to address one of the most significant reforms in the Goods and Services Tax (GST) framework since its launch in July 2017. The core proposal on the table is the reduction and rationalisation of GST slabs, aimed at simplifying the tax structure, easing compliance, and making goods and services more affordable for common citizens.

Key Reform Agenda: Two-Slab GST System

Currently, India’s GST operates under a four-tier structure with slabs of 5%, 12%, 18%, and 28%, along with a compensation cess levied on luxury and sin goods. However, the Centre has proposed a next-generation reform where the number of slabs will be reduced to just two main categories—5% and 18%, with a special 40% rate for select luxury and demerit items.

This proposal entails moving most items currently under the 12% and 28% brackets into either the 5% or 18% categories, thereby removing intermediate layers that create confusion and complexity in the system. The government believes this will streamline GST compliance, reduce disputes, and provide clarity for businesses and consumers alike.

Likely Beneficiaries: Cheaper Daily Use Goods

One of the most immediate outcomes expected from this restructuring is reduction in the prices of commonly used goods. A wide variety of items may see their GST rates drop from 12% to 5%, including:

• Food items such as ghee, nuts, namkeen, and packaged drinking water (20 litres).

• Everyday products like pencils, bicycles, umbrellas, and hairpins.

• Footwear and apparel falling under the current 12% category.

• Medicines and medical devices, easing healthcare costs for households.

This move is expected to provide significant relief to middle-class and lower-income families, who spend a larger portion of their income on essential commodities.

Opposition States Push for Compensation

While the Centre is pushing strongly for these reforms, opposition-ruled states have raised concerns about revenue losses that may follow from the pruning of tax slabs. Representatives from states such as Himachal Pradesh, Jharkhand, Karnataka, Kerala, Punjab, Tamil Nadu, Telangana, and West Bengal met last week to devise a collective strategy on safeguarding their fiscal health.

They have demanded that the Centre provide adequate compensation if the removal of the 12% and 28% slabs leads to a fall in state revenues. Historically, states were compensated for five years after GST’s launch in 2017, but this arrangement ended in 2022. States argue that without a fresh compensation mechanism, their development and welfare spending will face serious strain.

GST Background and Evolution

The GST regime was rolled out on July 1, 2017, unifying multiple indirect taxes such as excise duty, service tax, VAT, and octroi under one umbrella. Initially, the compensation cess fund was designed to reimburse states for revenue shortfalls, funded by levies on products like tobacco, luxury cars, and aerated drinks.

Over time, while GST collections have steadily risen, states continue to highlight that compliance costs, economic slowdowns, and uneven growth across sectors have impacted their fiscal position. The current proposal seeks to balance consumer affordability with revenue protection, making this Council meeting particularly crucial.

Industry and Market Impact

If implemented, the two-slab system could reshape business pricing strategies, with companies in FMCG, healthcare, textiles, and consumer goods sectors standing to benefit from lower input costs and increased demand. At the same time, industries catering to luxury products may face higher taxation under the special 40% bracket.

Tax experts believe that the move could also improve ease of doing business, reduce litigation arising from disputes over classification, and bring India closer to international GST models, which typically operate with fewer slabs.

Challenges Ahead

Despite the potential benefits, the reform faces challenges:

• Revenue loss fears from states reluctant to give up stable collections under the current system.

• Political disagreements, especially with opposition-ruled states seeking safeguards.

• The need for parliamentary amendments and coordination across ministries.

• Transition costs for businesses adjusting to new IT systems, invoicing, and compliance norms.

Conclusion

The 56th GST Council meeting marks a decisive moment in India’s taxation landscape. With the Centre proposing a simplified two-slab structure and opposition states seeking assurances on fiscal stability, the outcome of this meeting could reshape GST for the coming decade.

If consensus is achieved, consumers can look forward to cheaper goods and services, while states may push for compensation frameworks to ensure financial stability. The government’s ability to balance these competing interests will determine how successfully GST reforms are carried forward.

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