26th June 2025 (28 Topics)
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GST Council Review Meeting
Context
The Goods and Services Tax (GST) Council is set to meet in July 2025—over six months after its last meeting in December 2024—to discuss important changes, including:
- Reducing or restructuring the 12% GST tax slab, and
- Relief for service intermediaries, particularly in IT and export services.
What is the issue with the 12% Slab?
The GST Council is considering minimising or possibly eliminating the 12% slab.
- Simplification Goal: Reducing tax slabs from 5 to 4 (0%, 5%, 18%, 28%) will simplify the tax system. This could make compliance easier, reduce classification disputes, and improve tax efficiency.
- Likely Moves: Some goods currently at 12% may be moved down to 5% (e.g., basic processed foods). Some items from 18% may shift to 12%, if they are now seen as daily-use products.
- Consumer Behaviour Shift: Items like toothpaste and soap, once considered discretionary, are now essential due to rising per capita income. They may be moved to lower slabs to reflect this change.
- Impact on Manufacturers: If items move from 12% to 5%, manufacturers may lose Input Tax Credit (ITC).
- ITC is a refund mechanism for taxes paid on inputs. At 5%, this benefit is often not available, making manufacturing costlier.
What about Service Intermediaries?
- A key item on the agenda is to review GST on service intermediaries, especially Indian branches of multinational companies (MNCs).
GST Rate Structure (As of Now)India’s GST currently has a multi-tier rate structure, which includes:
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- A service intermediary is an entity that facilitates or arranges a service between a provider and consumer but does not supply the service itself.
- Example: Firm X (US-based) signs a global contract. Its Indian arm (Firm Y) executes the work and gets paid by Firm X. Under GST rules, Firm Y is treated as intermediary, taxed at 18%, even though it's exporting a service.
- Problem: These services are technically exports (which should be zero-rated, i.e., no GST). But under current GST law, intermediary services are taxed, leading to:
- Higher costs for Indian service providers
- Double taxation (Indian importer pays GST on full value, including intermediary cost)
- Tax burden on such services is estimated to be around Rs 3,500 crore annually.
Goods and Services Tax (GST) Council
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