55th GST Council meet: Sin tax, rates changes likely to reshape economy

The 55th GST Council meeting, scheduled for Saturday (December 21) in Jaisalmer, Rajasthan, is set to deliberate on crucial tax reforms expected to reshape the country's fiscal landscape.

The agenda includes proposed changes to GST rates on luxury goods and services, increased taxation on tobacco products, and exemptions for health and life insurance premiums.

Among the key proposals, the Council will consider moving 58 goods and 24 services to the 28 per cent GST slab, imposing a 35 per cent special GST rate on 148 items, and addressing the inverted duty structure to ease business liquidity issues. These reforms are anticipated to impact GST revenue, which already saw a record ₹2.10 lakh-crore monthly collection in April 2024, as well as influence consumer behaviour and market dynamics.

Transformative reforms

Against India's expanding economy and rising GST revenues — ₹1.73 lakh-crore in May 2024 alone — the meeting aims to address a series of transformative tax reforms. These changes target luxury goods, tobacco products, health and life insurance, and structural anomalies within the GST framework.

With robust revenue growth — up by 11.3 per cent year-on-year — the Council faces the dual challenge of sustaining this momentum while addressing long-standing inequities and inefficiencies in the tax system.

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One of the most anticipated topics is the proposed movement of 58 goods and 24 services into the highest GST slab of 28 per cent. This adjustment targets luxury goods like handbags, spa treatments, high-end bicycles, and premium stationery. Currently taxed at 18 per cent or 12 per cent, these items are considered fitting candidates for higher taxation to align with their premium pricing.

A report quoting Harsh Bhuta, Partner at Bhuta Shah & Co, said rate rationalisation could alter cost structures. "Stakeholders across industries will closely monitor developments, hoping for transformative measures that align with ease of doing business and fiscal stability," he said, adding that this meeting could mark a significant turning point for GST reforms.

The Group of Ministers (GoM), led by Bihar’s Deputy Chief Minister Samrat Chaudhary, has emphasised the growing market for luxury goods, a sector projected to expand significantly as affluent Indian consumers rise from 60 million in 2023 to an estimated 100 million by 2027.

Retailers, manufacturers wary

The rationale is straightforward: taxing high-end consumption aligns with progressive taxation, ensures revenue generation from those with greater spending power, and supports fiscal stability.

However, the implications of this shift are layered. While it could boost revenue, particularly in a market poised for luxury consumption growth, concerns about potential distortions linger. Higher taxes may discourage demand, disrupt supply chains, and increase administrative complexity for businesses managing tax compliance across shifting slabs.

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Retailers and manufacturers are particularly wary of how these changes might affect consumer sentiment in a competitive global market. Earlier this month, the Group of Ministers had suggested a special rate of 35 per cent on sin goods like aerated beverages, cigarettes, tobacco and related products.

"Another slab in GST, in the name of luxury and sin goods, is primarily a bad idea, which will defeat the very efficiency principle of taxation. Economists already feel a need for the number of slabs to be reduced, and the highest 28 per cent slab should be abolished," Ashwani Mahajan, National Co-convenor of Swadeshi Jagran Manch (SJM), cautioned. If the upcoming GST Council meeting approves this higher slab, it would complicate the GST system further and encourage smuggling, he added.

Tricky tobacco taxation

The proposed 35 per cent special GST rate on 148 items, including tobacco products and sugary beverages, marks another significant reform.

Tobacco taxation, already a contentious issue, has seen rates capped at 28 per cent, with exceptions like tobacco leaves taxed at 5 per cent under a reverse charge system. The new rate would be a step toward reducing consumption while generating additional funds for public welfare programmes.

This aligns with global trends where high taxes on tobacco and sugary products serve dual purposes: discouraging harmful consumption and supporting health initiatives.

Yet, these measures are not without challenges. Analysts said the risk of illicit trade and counterfeit products could undermine the effectiveness of higher taxation. Moreover, the socio-economic impact on those employed in tobacco farming and related industries adds another layer of complexity.

Exemption for life premiums?

In an equally significant move, the GoM has recommended changes to the taxation of health and life insurance premiums. The proposals include exempting term life insurance premiums from GST entirely, removing GST on health insurance premiums for senior citizens, and reducing rates for policies exceeding ₹5 lakh.

These measures aim to make insurance more affordable and accessible, encouraging broader adoption. The changes could provide much-needed financial relief for senior citizens and lower-income groups.

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While these exemptions might reduce immediate tax revenues, their long-term impact could strengthen economic stability by reducing healthcare-related out-of-pocket expenses.

Inverted duty structure

Addressing the inverted duty structure remains a critical issue for the Council. This anomaly, where raw materials attract higher GST rates than finished goods, creates liquidity challenges and blocks input tax credits, hampering business operations.

Proposed solutions, including lowering GST rates on inputs and streamlining refund processes, promise to ease these burdens. Such measures would enhance cost competitiveness, encourage local sourcing, and improve export viability, fostering a more business-friendly environment.

These reforms could also attract foreign investment, signalling India’s commitment to rationalizing its tax system.

Debate on petroleum products

Including petroleum products under GST is another topic expected to spark intense debate. Currently excluded, petrol and diesel fall outside the GST framework, preventing businesses from claiming input tax credits for taxes paid on these fuels.

While their inclusion could simplify the tax structure and reduce cascading taxes, state governments remain apprehensive about potential revenue losses. Petroleum taxes are a critical revenue source for states, and deciding to include these products under GST is a politically sensitive issue.

The Council may deliberate on a roadmap for inclusion, but consensus seems unlikely.