New Delhi: In a major overhaul of the multitiered goods and services tax (GST) structure, the Central government has proposed scrapping the 12% and 28% slabs, among other reforms to India's indirect tax regime that are expected to stimulate economic growth.

In the short term, however, the GST restructuring could result in lower revenues flowing to the exchequer, a central government official said on Friday.

As per the proposal, most of the products and services attracting a tax rate of 12% and 28% will be shifted to the 5% and 18% slabs, respectively. A few remaining items in the 28% bracket—currently the highest—will be moved to a new 40% slab that will cover only a few 'sin goods' such as tobacco products, the official said.

"In the context of the US tariff-related uncertainty, some boost in demand was needed. The GST reform comes in handy in this regard," said D.K. Srivastava, chief policy advisor, EY India.

The consumption stimulus follows a massive income tax relief offered in the Union Budget for 2025-26 and a 100-basis-point reduction in the repo rate by the Reserve Bank of India since February to boost economic growth.

The government's proposal has been sent to a GST Council ministerial group led by Bihar deputy chief minister Samrat Chaudhary. The panel will place its report before the Council at its next meeting, likely in September or October.

Sectors such as auto components, handicraft, healthcare and medical devices, textiles, fertilizers, and insurance services will benefit from the GST restructuring, the official said, adding that tax anomalies will also be corrected and refunds expedited as part of the exercise.

"As a result of the proposed restructuring, a substantial majority of the goods and services will come to the 5% and 18% slabs," said a second government official. Both of them spoke on condition of anonymity.

Prime Minister Narendra Modi first announced the GST overhaul as part of his Independence Day speech on Friday, describing it as a 'double Diwali' for people.

Supporting consumption, improving investments

Correcting the anomaly of higher taxes on inputs and lower tax outgo on finished products will reduce instances of tax credits getting accumulated for businesses in sectors like fertilizers and textiles, said the first official quoted above, adding that resolving this will help improve investments in these sectors.

"There will be a revenue gap in the short term because of shifting goods and services from higher slabs to the lower ones, but it will be made up for by increased consumption of goods and services," the official said, adding that a simplified registration process as part of the GST reforms will benefit businesses, especially small enterprises and startups.

"Overall, the GST rate rationalisation and restructuring effort will be a growth-enhancing move because of the support it gives to consumption demand and the cost reduction to businesses by way of efficiency gains in the tax system," said Srivastava of EY India.

Because of the tax relief on mass consumption goods, there will be a positive impact on overall demand, particularly in rural areas and in lower-to-middle-income groups in urban areas, explained Srivastava, who expects the tax restructuring to be either near revenue-neutral or have some fiscal costs.

Several sectors to benefit

The revamp of the GST system will also see the expiry of the compensation cess levied on items such as sports utility vehicles (SUVs), tobacco, and sugary drinks.

Given that many of the products and services taxed at 28% will move to 18% slab, some segments of the automobile market could also benefit, but the officials declined to comment specifically on individual commodities or services.

Special rates for select items—such as the 3% rate for gold, silver, and precious stones—will continue.

The 28% slab had started with 229 products when GST was introduced in 2017, but many products have been moved to the 18% bracket in multiple rounds of tax rate reduction. The 28% slab still covers products such as cement, certain types of air-conditioners, dish washers, and automobiles of different specifications, including sports utility vehicles.

Products currently in the 12% slab include sugar, boiled confectionery, jams and marmalades, condensed milk, preserved meat, vegetables, fish, insulin, animal fat, beverages containing milk, tableware and kitchenware, diagnostic kits, and handbags.

Balancing simplicity with fiscal prudence

The reduction in tax burden will lead to further lowering of the revenue neutral rate of GST—the weighted average rate that was needed for the transition to the indirect tax regime in 2017 to be a revenue-neutral affair to the exchequer.

The rate was last estimated to have dropped from 15.6% to a little more than 11% due to successive rounds of tax cuts. However, the expansion of the tax base has led to strong GST revenue buoyancy for both central and state governments, said the second official quoted earlier.

"The government's intent to move towards a two-rate GST (and a demerit rate on select goods) coupled with streamlined input tax credit refunds (both on inverted duty and exports) is clearly a move in the right direction to make the system more efficient and less litigious," said Abhishek Jain, partner and national head, indirect tax, at KPMG. "It balances simplicity with fiscal prudence, signalling a maturing GST regime."

Reduction of indirect taxes would enhance affordability, boost consumption, and make essential and aspirational goods more accessible to more people, the Union finance ministry said in a statement after the Prime Minister's announcement on the GST reforms.

Reduction of GST slabs will lead to a simple tax with two slabs—standard and merit—with special rates only for select few items, the ministry said.

It also said that the end of GST compensation cess had created fiscal space, providing greater flexibility to rationalise and align tax rates within the GST framework for long-term sustainability.

GST reforms will also seek to reduce classification-related disputes, correct inverted duty structures in specific sectors, ensure greater rate stability, and enhance ease-of-doing business, the ministry added.

"We are bringing the next generation of GST reforms," Prime Minister Modi said in his speech. "This will be a gift to you. By this Deepavali, tax will be reduced in the case of commonly used items in a big way. It will also benefit small businesses. With that, the economy will also benefit."