GST Council set to discuss reducing items in 12% slab
The agenda for the Goods and Services Tax (GST) Council at its next meeting will include deliberations on minimising the 12% tax slab and also finalising the tax treatment on service intermediaries, which could provide the sector relief worth thousands of crores, according to informed sources.
Further, while the meeting was initially supposed to be held in June, there has been some back-and-forth between members of the Council over the location of the meeting, leading to delays. It will now likely be held in July 2025, which would be more than six months after the last meeting, which was held in December 2024 in Jaisalmer.
According to the rules, the GST Council is meant to meet once every quarter, or three months.
'One of the main agenda items, as part of the overall simplification and rate rationalisation effort, is what to do with the 12% slab,' an official aware of the developments told The Hindu. 'One of the internal recommendations was to minimise the slab or maybe even do away with it entirely.'
Doing away with the 12% rate would reduce the number of tax rates under GST to 0%, 5%, 18%, and 28%, not counting the specialised rates of 0.25% on diamonds and 3% on gold and silver, or the additional compensation cess on items in the 28% slab.
'It is improbable that the GST Council will completely abolish the 12% tax slab,' Saurabh Agarwal, Tax Partner at EY India, explained. 'Instead, they are likely to gradually reduce the number of items in this category by shifting them to the 5% slab. Additionally, some items currently taxed at 18% may be moved to the 12% slab.'
This adjustment would reflect a change in consumer behaviour, he said, since rising per capita income meant that many products that were once considered discretionary, such as toothpaste and soap, have become everyday necessities. Currently, toothpaste and soap are taxed at 18% and shampoo can be taxed as high as 28%.
Input tax credit
However, other tax experts say that moving items from the 12% slab to 5% might not always be a good thing for the manufacturers. At 12%, they are eligible for input tax credit, which will likely be revoked if they are moved to 5%. This means the manufacturers would not get credit for the tax they pay on inputs.
The Hindu has learnt that the other major item on the agenda of the GST Council would be the taxation of service intermediaries. Currently, service intermediaries are taxed at 18% even when they provide services to companies abroad. This is likely to be removed.
An increasingly common occurrence, especially in the IT space, is for the Indian arm of a multinational company to execute an order for the MNC within India. For example, suppose Company A buys a service from Firm X, an MNC based in the U.S. Firm X asks its India arm, Firm Y, to fulfil the order in return for payment from Firm X. In such a scenario, Firm Y is exporting its services to Firm X. Yet, under the current GST law, it is still taxed on those services.
'The current framework continues to tax intermediary services even when rendered to overseas clients, leading to a double whammy,' Manoj Mishra, Partner and Tax Controversy Management Leader at Grant Thornton Bharat, said. 'First, it raises costs for Indian service providers, and second, it results in double taxation since Indian importers pay duty on the full value, including what is paid to the intermediary.
According to Mr. Mishra, the tax exposure from these service intermediaries is around ₹3,500 crore, making the issue a very significant one for the industry.
Given that these services bring in valuable foreign exchange, there is an expectation of treating it as zero-rated supplies,' he said. 'Such treatment would not only help reduce the tax burden and compliance uncertainty but would also be consistent with the approach taken by courts.'
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