The GST Council recently voted to reduce the number of items in the highest tax slab, with effects that are now being felt across India’s economy. Of the 228 items previously taxed at the highest rate of 28%, only 50 were left in that slab by the Council’s decision. The other 178 items’ GST rates were significantly reduced, some of them to zero. In a statement to the public, the GST Council made clear that the top slab still included luxury items, “sin” products, and certain other goods considered nonessential. In this category are washing machines, air conditioners, cement, and parts that go into cars, airplanes, and yachts.
The Council hopes that reducing GST rates for the other items on the list can provide relief to necessary goods, stimulate trade and growth, and encourage small businesses to compete on a level field with their larger rivals.
Top-Slab Items That Were Reduced to 18%
Most of the goods seeing a reduced GST slab dropped one level to the 18% tier. The list is varied and has no clear theme, though each seems to be the result of extensive discussion and negotiation in Council proceedings. Some of the more notable items this affects are consumer goods, such as:
- Sanitary materials
- Wrist watches
In addition, the Council reduced the 28% GST rate on construction materials and fire-fighting equipment to the 18% slab. Larger restaurants, such as those located inside hotels making over RS7,500 annually have also been reduced to 18%, and they get to keep their credits. Smaller restaurants, meanwhile, are losing their GST credits, but enjoy an overall GST rate reduction to 5%. It is hoped this change can bring real relief to struggling small restaurants, especially those located away from high-traffic tourist zones. The original distinction between restaurants with air conditioning and those without has now been abolished.
Items Reduced to 12%
Some items dropped further still, to 12%. In the first round of cuts, the Council unilaterally cut only two items from the top slab to 12%, but the Parliament later adopted recommendations of the Council to add 11 more to the list. Items included in this slab now are:
- Condensed milk
- Refined sugar and sugar cubes
- Condiments, such as curry paste, mayonnaise, and salad dressing
- Diabetic-specific foods
- Medicinal-grade oxygen
- Printing ink
- Hand bags and some shopping bags made with local materials jute and/or cotton
- Handmade hats
- Agricultural machine parts
- Some sewing machine components
- Eyeglass frames
- Furniture made entirely out of bamboo or cane
Some items on this list seem to be aimed at needy consumers, as in the case of sugar and diabetic foods, or of medical oxygen. Others are clearly intended to boost the margins for domestic handicraft industries, such as hat makers and furniture shops that use traditional methods and materials.
New Additions to the 5% GST Rate
In addition to small restaurants, the Council voted to cut the GST rates of many semi-processed materials to 5%. Not all of these were originally in the top slab, since the Council has been aware of the need for cheap materials from the start. The latest round of cuts goes further, dropping even some formerly 18% items to the bottom effective rate. These items include:
- Desicated coconut
- Narrow-woven fabric
- Idli and dosa batter
- Finished leather and composition leather material
- Jute twine, coir products, and ropes made from local materials
- Fishing nets and hooks
- Secondhand clothing
- Fly ash brick
The clear theme among these reductions is to drastically cut the cost of doing business for clothiers, small retailers, and many traditional lifestyle businesses, such as fishermen living on the coast. The presence of two items on the list, batter and desiccated coconut, signals a willingness to support local food producers into the processing stage, where many of these food items are prepared for export.
Some Items Reduced to Zero
The Council went further still for some items by reducing their effective GST rates to zero. This list is somewhat shorter than the others, but the items on it all hold basic positions in the Indian economy. The products and the processes that these goods go through affect multiple sectors of the economy, and many go straight into bulk food products and basic goods for the poor. They include:
- Guar meal
- Hop cone
- Selected dried vegetables, such as sweet potatoes and maniac
- Frozen fish
- Dried fish
- Unworked coconut shell
- Khandsari sugar
Interestingly, the Council seems to have made a judgement call on the desirability of some of these items. Khandasari sugar, for example, is made from syrup and has no chemical additives or other adulterants. That means it spoils more quickly than refined sugar, which is now taxed at 12%, but it is often taken to be a healthier choice than the alternatives.
When the GST Council met in November 2017 for its 23rd session, its members made sweeping decisions about the products and industries India should prioritise. By cutting most of the top GST rates and by dropping many of the lower ones, some to zero, the Council has taken a bold step toward promoting local, small-scale, and healthy activities among India’s small business community.