The introduction of the Goods and Services Tax (GST) in July 2017 was a landmark reform in India’s indirect tax regime. By merging a patchwork of central and state taxes into a unified system, GST aimed to create a seamless national market, simplify tax administration, and enhance compliance. While it has made significant strides in these areas, one persistent concern continues to haunt stakeholders—the multiplicity of tax slabs. Amongst them, the 12% slab increasingly appears redundant, prompting a renewed discussion: Is it time to remove the 12% GST rate?
Currently, India’s GST framework has four primary tax slabs for goods—5%, 12%, 18%, and 28%—along with exemptions (0%) and special rates like 3% for gold and 0.25% for diamonds. Services typically fall under 5%, 12%, or 18%. Though this multi-tiered structure was intended to strike a balance between social equity and revenue needs, it has added layers of complexity to compliance and classification, especially for small and medium enterprises.
The core problem with having many slabs is the confusion and administrative burden they create. Multiple rates lead to interpretational challenges, impact pricing strategies, and complicate accounting systems. The 12% slab, in particular, overlaps with the 5% and 18% categories, making it a grey area. This overlap often results in classification disputes, litigation, and legal uncertainty—precisely the inefficiencies GST aimed to eliminate.
Take the case of beverages—an everyday item for most households. A soya milk drink attracts 12% GST, fruit pulp-based beverages also fall under the 12% rate, and milk-based drinks are similarly taxed. But if you pick up a flavoured water or herbal beverage without a specific classification, you could be charged 18%. Carbonated drinks with added sugar or caffeine are taxed at 28%. Despite being consumed in similar settings, these minor differences in ingredients lead to widely different tax rates. Such inconsistencies not only confuse consumers but also create compliance headaches for businesses.
Acknowledging these concerns, the GST Council constituted a Group of Ministers (GoM) to propose a roadmap for rate rationalisation. While the final report is awaited, early indications suggest a strong push to eliminate the 12% slab altogether. The broader vision appears to be a three-rate structure—5%, 18%, and 28%—with a possible lower rate for essential items. Simplifying rates in this manner would help minimise classification disputes and streamline compliance for taxpayers.
Eliminating the 12% slab could deliver several tangible benefits. For one, it would reduce ambiguity for businesses, especially MSMEs, and make it easier to classify goods and services correctly. It would also simplify auditing and monitoring for tax authorities, improving revenue administration. Moreover, aligning India’s GST structure with international norms—where most countries operate with a single or dual-rate VAT—would send a positive signal to global investors.
That said, the transition would not be without its challenges. If goods currently taxed at 12% are moved to 18%, the price hike could increase inflationary pressures, particularly on items like processed foods, household products, and low-end appliances. Sectors like construction, textiles, and FMCG may face cost escalations that affect demand and margins. Furthermore, transitioning would require system updates, contract revisions, and communication with stakeholders—all of which could be time-consuming and resource-intensive.
To ensure a smooth shift, a phased and calibrated approach is essential. Essential items in the 12% category could be moved to 5%, while less critical items may be adjusted to 18%. Transitional support like staggered implementation, temporary tax credits, or targeted relief measures could cushion the impact. Monitoring inflation closely and ensuring consumer prices remain stable will be crucial to the reform's acceptance.
India’s GST ecosystem is far more robust today than when it was launched—thanks to digital tools like e-invoicing, e-way bills, and advanced analytics. These capabilities position the country well to undertake structural reforms. Rationalising tax rates is a logical progression to fulfil the original promise of GST: to be a Good and Simple Tax.
The removal of the 12% slab is not merely a technical adjustment, it is a step toward greater efficiency, fairness, and clarity in the tax regime. However, the reform must be implemented thoughtfully, backed by clear communication, and supported with adequate transitional measures. As GST continues to mature, simplifying the rate structure is no longer just desirable—it is necessary. The time to act is now.
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