GST Council May Rationalise 12% Slab, Address Service Intermediary Taxation
By Suryavanshi IAS | Economy Insights for UPSC Aspirants
Context
The Goods
and Services Tax (GST) Council, India's apex decision-making body on
indirect taxes, is expected to meet in July
2025—marking the first meeting in over six months. The agenda includes
two critical economic decisions:
1.
Rationalising or
Minimising the 12% GST slab
2.
Reviewing the tax
treatment of service intermediaries
These developments are crucial for UPSC aspirants as they touch upon tax structure reform, ease of doing business, and export promotion—topics central to both Prelims and Mains.
What’s
Happening with the 12% Slab?
Current
GST Slabs:
·
0%, 5%, 12%, 18%, 28%
·
Special rates: 0.25% (diamonds), 3% (gold/silver),
and compensation cess (for select items like luxury cars)
The
Plan:
·
Internal recommendations suggest minimising or even eliminating the 12% slab.
·
This would simplify GST by reducing rate
categories to: 0%, 5%, 18%, and 28%.
Expert Opinion:
·
Unlikely
to abolish 12% fully; more realistic:
o Shift some items from 12% to 5%
o Move some essentials (currently 18%)
down to 12%
o For example, toothpaste and soap are taxed at 18%, but due to rising per capita income, these are now daily necessities.
What’s
the Concern for Manufacturers?
Input Tax Credit (ITC):
·
At 12%,
manufacturers enjoy input tax credit
on raw materials.
·
If items shift to 5%, ITC may be lost,
increasing cost of production.
Key
Concept for UPSC:
ITC allows producers to claim credit for the GST they pay on inputs. Lower tax rates may remove this benefit, affecting profitability.
Big
Relief Expected for Service Intermediaries
What’s
the Issue?
·
Indian service
intermediaries working for foreign firms (especially in IT and consulting) are taxed at 18%, even when services are exported.
·
This causes:
o Cost escalation for Indian providers
o Double taxation
o Loss of competitiveness
Example:
·
Firm X (US) contracts Firm Y (India) to deliver
a service.
·
Firm Y is paid in foreign currency but is still taxed in India under current rules.
What’s
Proposed?
·
Treat such exports as zero-rated supplies
·
This would:
o Eliminate tax burden
o Ensure parity with court judgments
o Promote India as a service export hub
o Save the industry ₹3,500 crore
UPSC
Linkages
Prelims:
·
Know the GST
rate structure, what zero-rated
supply means, and GST Council’s functions (Art. 279A).
Mains (GS III – Indian Economy):
·
Discuss
the significance of tax rationalisation under GST.
·
Analyse
the impact of intermediary taxation on service exports and foreign exchange
earnings.
Constitutional Mandate of GST Council
·
Article
279A: GST Council must meet once
every quarter
·
Last meeting: December 2024 (Jaisalmer)
· Next likely meeting: July 2025 (delayed due to venue disputes)
Conclusion
The proposed rationalisation of GST slabs and reforms in service intermediary taxation mark a crucial step in India’s move towards a simplified, efficient, and export-friendly tax regime. For UPSC aspirants, this is an ideal example of the intersection between tax policy and economic development, and must be included in your Economy notes and Mains answer frameworks.
Stay Ahead with Suryavanshi IAS – Where Current Affairs Meets Conceptual Clarity
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