The Goods and Services Tax (GST) Council, in its 56th meeting, approved the new two-slab tax structure effective from September 22. All decisions were taken unanimously, with no disagreement from any state

• It scrapped the 12 per cent and 28 per cent slabs, reduced tax on several essential goods, and placed higher levies on select ‘sin’ items

Key Outcomes of the 56th GST Council Meeting

1. Next-Generation GST Reform Approved: Marks the biggest overhaul since GST’s introduction in 2017, aligning with PM Modi’s Independence Day announcement.

• Objective: Make GST a simpler, citizen-centric, and growth-oriented tax system, ensuring ease of living and ease of doing business.

2. GST Rate Rationalisation

• Two-Slab Structure Introduced
  • Standard Rate: 18% (For most goods & services)
  • Merit Rate: 5% (For essentials & mass consumption items)
  • Special De-Merit Rate: 40% (Sin and Luxury goods for pan masala, tobacco, high-end vehicles, aerated drinks, etc.)
  • Subsuming Compensation Cess: Eliminating a separate cess regime and incorporating it into the 40% slab for sin/luxury goods.
• Major Rate Reductions
  • Massive Rate Cuts:
    • 99% of items in 12% slab to move to 5% slab.
    • 90% of items in 28% slab to move to 18% slab.
    • 5% slab: Now covers many everyday essentials such as packaged food, soaps, medicines, toothpaste, milk products, and even life & health insurance (now fully GST-exempt). 
    • 18% slab: Applies to standard goods and services, including appliances, TVs, cement, and small cars (previously at higher rates). 
    • 40% slab: Introduced for “sin goods” and luxury items, such as tobacco, cigarettes, and high-end cars. The previous 28% slab is removed for these goods. 
    • 0% (exempted): This rate still applies to fundamental essentials, such as some fresh food items.
      • Life & health insurance is now GST-exempt

3. Structural Reforms

• Inverted Duty Structure Correction: Correction of long-pending inverted duty structure for the manmade textile sector by reducing GST rate on manmade fibre from 18% to 5% and manmade yarn from 12% to 5% and 
  • Correction of inverted duty structure in fertilizer sector by reducing GST from 18% to 5% on Sulphuric acid, Nitric acid and Ammonia 
• Pan Masala & Tobacco: GST to be levied on Retail Sale Price (RSP) instead of transaction value to plug revenue leakages.

4. Process Reforms

• Registration
  • Automatic registration within 3 working days for applicants.
  • Determined by system-based data analysis.
  • Eligibility check for those who have not passed Input Tax Credit (ITC) exceeding ₹2.5 lakh per month and who opt for the scheme.
• Refund: Sanction of Provisional Refunds by proper officer through system-based risk evaluation for:
  • Zero-rated supplies (exports, SEZ units).
  • Supplies with Inverted Duty Structure (where input tax is higher than output tax).
    

5. Institutional Strengthening

• Operationalisation of GST Appellate Tribunal (GSTAT): Accepting appeals by Sept 2025 and hearings to commence by Dec 2025.
  • Principal Bench to act as National Appellate Authority for Advance Ruling.
• Outcome: Strengthens dispute resolution, reduces litigation backlog, and enhances taxpayer certainty.
  

Positive Economic Implications

• Boost to Consumption:  Lower rates on FMCG, food, and daily-use goods will increase disposable income and encourage spending.
• Inflation Impact:  CPI inflation may reduce by 10–15 bps for food and 5–10 bps for other goods and services, given partial pass-through of lower taxes.
• MSME & Rural Demand:  Simplified rates and cheaper inputs will reduce logistics and compliance costs, benefiting MSMEs and rural economy.
• Competitiveness:  Lower tax on inputs and outputs makes Indian products more competitive globally.
• Insurance Relief:  Proposed nil GST on life & health insurance premiums would ease household financial burdens.
• Inflation Moderation: When GST rates on food, essentials, and daily-use items are cut, prices of those items drop (assuming businesses pass on the benefit). 
  • Since food & essentials carry a high weight in CPI (≈ 45%), even a small price drop across this basket has a measurable effect on the overall inflation number.

Challenges

• Revenue Strain on States: Weighted average GST rate could drop from 11.6% to 9.5%, implying potential annual revenue loss of ₹85,000 crore.
• Short-Term Fiscal Pressure:  Immediate revenue shortfall may force the Centre to offer compensation mechanisms, phased sharing, or transitional loans. Sates may need transitional compensation or phased implementation.
• Delayed Consumption Spike:  Consumers may postpone purchases until lower GST rates are implemented, causing a temporary slowdown.
• Fiscal Balance Concerns:  With recent direct tax concessions, there is limited fiscal space. Sin taxes and other measures may be used to offset revenue loss.
  • Centre-State Consensus: Requires strong cooperative federalism to address fiscal autonomy concerns.
• Pass-Through Uncertainty: Actual price reductions depend on businesses passing on benefits.

Conclusion

• Next-generation GST reforms are not just a rate-cut exercise — they are a strategic reset to make GST: Simpler (fewer slabs, fewer disputes), Fairer (cheaper essentials, better ITC flow), Growth-Oriented (boosting consumption & manufacturing), and Resilient (sustaining state revenues & fiscal stability).
• These reforms will help GST evolve from a unifying tax to a catalyst for economic transformation, supporting India’s vision of becoming a developed economy by 2047.

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