GST Council Meeting: Hour of GST 2.0 arrives; all eyes on Team Modi's Diwali gifts for Indian economy

With GST Council's much-awaited, likely path-breaking meeting about to open, all eyes are on what reliefs and goodies India might get that could help soften the blow of tariffs on the economy and set the tone for a major festive-spending boost. Economy watchers will also be closely looking at what kind of fixes, if any, have been found for some of the long-standing sticking points in the GST mechanism.The Council, chaired by Finance Minister Nirmala Sitharaman and comprising state finance ministers, will debate the Centre’s proposal to replace the existing four-tier tax system with just two slabs—5 and 18 per cent. A special 40 per cent rate has also been suggested for certain luxury and demerit goods.Prime Minister Narendra Modi had announced plans for GST reform in his Independence Day speech this year, followed by a blueprint shared with a Group of Ministers (GoM).A reform of the GST system has long been in the offing. The September 3–4 meeting will be crucial in determining the direction of that reform. Key highlights of govt's new GST planAccording to the Centre’s plan, 99 per cent of items currently under the 12 per cent slab will be shifted to 5 per cent, while 90 per cent of items taxed at 28 per cent will move to 18 per cent. Only a handful of luxury and demerit goods will be subject to the proposed 40 per cent rate.The Centre is set to press for a 5 per cent tax on electric vehicles as part of its sweeping overhaul of the Goods and Services Tax (GST) regime, which will come up for discussion at the meeting.The GoM endorsed the rationalisation of slabs but recommended that electric vehicles priced up to Rs 40 lakh be taxed at 18 per cent. The Centre, however, is expected to push for a lower 5 per cent rate to accelerate EV adoption.The debate over EV taxation is likely to be one of the sharper points of contention, balancing fiscal concerns with the Centre’s ambition of promoting clean mobility.At the same time, the broader GST restructuring could reshape India’s consumption landscape, cutting costs for households but posing new challenges for state finances.GST 2.0: Winners and losersIf approved, most household food items such as ghee, nuts, packaged water, non-aerated drinks, namkeen, medicines and some categories of footwear and apparel could shift from 12 per cent to 5 per cent. Everyday products like pencils, bicycles, umbrellas and hair pins may also be taxed at the lower rate.Electronics such as certain televisions, washing machines and refrigerators, which currently attract 28 per cent GST, could fall to 18 per cent, making them cheaper.Automobiles may see differentiated rates: entry-level cars at 18 per cent, while SUVs and luxury vehicles move to the new 40 per cent bracket. The highest slab will also apply to tobacco, pan masala and cigarettes, with scope for an additional levy on top.Pushback by statesOpposition-ruled states are wary of the revenue fallout.West Bengal has argued that any levy above the 40 per cent rate must be earmarked for states to offset losses.Eight states -- Himachal Pradesh, Jharkhand, Karnataka, Kerala, Punjab, Tamil Nadu, Telangana and West Bengal -- have demanded a clear compensation mechanism post-rejig. They contend that the removal of slabs will inevitably reduce state revenues.The Centre counters this by arguing that lower taxes will lift consumption, which in turn will balance out revenue collections in the medium to long term. Officials have also stressed that the new framework has been designed to minimise disruptions while simplifying compliance for businesses.Opposition-ruled states are expected to hold consultations among themselves before the meeting to align their strategy.Compensation cess: A major sticking pointWhen GST was launched in July 2017, it replaced multiple indirect taxes with a four-tier structure of 5, 12, 18 and 28 per cent. A compensation cess on luxury and demerit goods was designed to fund payouts to states for revenue losses.This cess was primarily designed to make up for states' revenue losses during the first five years of GST. It expired in June 2022.The new deadline for ending compensation cess is March 31, 2026, but the council has been deliberating on ending it earlier. The urgency is because the repayment of Covid-time loans that Centre raised to compensate states for revenue shortfall is coming up.This meeting will possibly discuss ending compensation cess by October 31, ahead of the deadline, in view of the urgency of the above-mentioned loan matter.