GST RATE RATIONALISATION
- V P R A AND ASSOCIATES LLP
GST Rate Rationalisation 2025 – Proposal & Implications
• Towards a Simplified Two-Rate GST System
• The Government of India, along with the Group of Ministers (GoM), has
initiated one of the most significant reforms since the rollout of GST in
2017 – a move to rationalise the existing rate structure.
• This presentation highlights the decisions taken, proposed changes,
rationale, expected benefits, and challenges for businesses and
consumers.
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Decisions by GoM
• The Group of Ministers (GoM), chaired by Bihar Deputy Chief Minister Samrat
Choudhary, and including finance ministers from states such as Uttar Pradesh,
Rajasthan, West Bengal, Karnataka, and Kerala, has endorsed the Centre’s plan
to simplify GST rates.
• The GoM has specifically supported the idea of removing the 1 2 % and 2 8 %
slabs and realigning items into a two-rate system.
• These recommendations will now be placed before the GST Council for final
approval in its upcoming meeting scheduled for September 2 0 2 5 .
• This represents a strong step towards simplifying India’s indirect tax regime.
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Current vs Proposed GST Structure
• At present, GST in India is divided into four main rates – 5%, 12%, 18%, and 28% –
with an additional cess levied on luxury and sin goods.
• The proposed structure collapses this into two major slabs, alongside a higher rate for sin
goods:
• - 5% (Merit Rate): Applied on essential and mass-consumption items to ensure
affordability for the common man.
• - 18% (Standard Rate): Covers the majority of goods and services to maintain revenue
neutrality while reducing complexity.
• - 40% (Sin Rate): To be levied only on items such as tobacco, luxury cars, and high-end
luxury or sin products.
• - Sub-1% concessional rate: May be retained for special items like precious stones and
affordable housing, though still under review.
• This reform aligns India with international best practices, where most countries follow a
two-rate VAT/GST system.
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SECTORAL CHANGES
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SECTORAL CHANGES
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SECTORAL CHANGES
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SECTORAL CHANGES
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SECTORAL CHANGES
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Reclassification of Items
• A major part of the proposal is the reallocation of items currently taxed at 1 2 % and
2 8 %.
• - Nearly 9 9 % of items presently taxed at 1 2 % will move to 5 %, directly benefiting
consumers by reducing prices on several household and intermediate goods.
• - Almost 9 0 % of items at 2 8 % will move to 1 8 %, lowering costs of several
consumer durables, automobiles, and industrial products.
• - Only truly luxury and sin goods will remain in the higher bracket of 4 0 %.
• This change removes one of the most contentious areas of GST – disputes over
classification between 1 2 % and 1 8 % – providing clarity and reducing litigation.
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Rationale & Benefits of Reform
• The move towards a two-rate GST system is intended to achieve multiple objectives:
• - Consumer Relief: Reduction of tax rates on essential and commonly used goods
will provide immediate financial relief to farmers, MSMEs, and middle-class
households.
• - Simplified Compliance: With fewer slabs, businesses will face less ambiguity in
classifying products, which will in turn reduce litigation and disputes.
• - Boost to Consumption: Lower rates are expected to make goods more affordable,
driving higher demand and boosting the economy.
• - Improved Transparency: By removing rate overlaps, the tax system becomes more
predictable and business-friendly.
• - Political Messaging: Positioned as a “Diwali Gift” by the government, this reform
also signals the beginning of what is being called “Next-Generation GST Reforms.”
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Additional Recommendations under Consideration
• Apart from the rate rationalisation, the GoM also discussed the exemption of
GST on health and life insurance premiums.
• This move is intended to provide social security and encourage more citizens
to buy insurance policies.
• However, the estimated annual revenue loss from this exemption is about
₹9,700 crore.
• The GST Council will debate whether this revenue loss should be borne by both
Centre and states and balance it against the social benefit of making insurance
more affordable.
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Implications on Input Tax Credit (ITC) & Refunds
• One of the most significant practical issues businesses will face due to the reduction in
GST rates is the impact on Input Tax Credit (ITC).
• - If businesses have purchased goods at a higher GST rate (say 12% or 28%) and the final
product is later taxed at 5% or 18%, they may end up with excess ITC.
• - This situation creates an inverted duty structure, where input taxes are higher than the
output tax liability.
• - Refunds are allowed under Section 54 of the CGST Act, but only for inputs (raw
materials). Refunds are not allowed on input services or capital goods, leading to
possible blocked credit.
• - As a result, refund claims are expected to rise significantly, especially in sectors like
textiles, FMCG, and MSMEs dealing with fast-moving goods.
• This transitional phase could lead to increased compliance and working capital stress for
businesses until refund mechanisms are streamlined.
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Transitional Challenges for Businesses
• While the long-term benefits of the reform are substantial, businesses will have to
prepare for certain short-term challenges:
• - Stock Revaluation: Companies will need to revalue their inventories as of the
effective date of rate change, to adjust for reduced output GST liability.
• - Stock Declarations: Businesses may be required to file stock declarations to
claim additional ITC or refunds.
• - Blocked ITC: Wholesalers and retailers holding large inventories at higher GST
rates may face cash flow constraints if refunds are delayed or restricted.
• - Temporary Compliance Burden: Increased refund applications, reconciliations,
and adjustments in ERP systems will require time and resources.
• - Pricing Adjustments: Businesses may need to pass on tax reductions to
consumers, requiring revisions in invoicing and contracts.
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Anti-Profiteering & GST Rate Rationalisation
• Anti-profiteering measures under GST, provided in Section 171 of the CGST
Act, ensure that any benefit from a reduction in GST rates or increase in input
tax credit is passed on to consumers through commensurate price reduction.
If businesses fail to do so, it amounts to profiteering.
• These provisions are especially important during GST rate rationalisation,
ensuring that the benefit of reduced tax rates is not retained by businesses but
reaches consumers.
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Conclusion
Despite these transitional hurdles, the long-term outlook is positive:
• Fewer Disputes,
• Simpler Compliance, and
• Greater Transparency.
Thank You
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