The Goods and Services Tax (GST) Council is on the brink of a major overhaul of India’s indirect tax structure, with a proposal to eliminate the 12 percent GST slab and shift items to either the 5 percent or 18 percent brackets. While the move has garnered broad consensus among officials and experts, two categories—medicines and tractors—have emerged as significant sticking points, threatening to complicate the transition and delay the Council’s final decision.
The Push for a Simpler GST Structure:
India’s GST regime currently operates with four main tax slabs: 5 percent, 12 percent, 18 percent, and 28 percent. The 12 percent bracket, which covers a wide range of goods including processed foods, household items, certain medical products, and agricultural machinery, is now seen by many policymakers as redundant. The aim is to streamline the system, reduce compliance burdens, and bring India’s tax structure closer to global standards, where two or three rates are the norm.
Officials advising the Group of Ministers on rate rationalization have reached a near consensus that the 12 percent slab could be scrapped without major disruption for most items. Most goods and services currently taxed at 12 percent could be shifted down to 5 percent or up to 18 percent, depending on their nature and socio-economic impact. This rationalization is expected to improve compliance, reduce classification disputes, and make the system more transparent for businesses and consumers alike.
Medicines: Balancing Revenue and Public Health
Medicines—spanning allopathic, ayurvedic, homeopathic, veterinary drugs, diagnostic kits, and surgical dressings—are a major concern in the proposed shift. Moving these products from the 12 percent to the 5 percent slab would provide relief to consumers and align with the principle of taxing essential goods at lower rates. However, such a move would result in a significant revenue loss for both the central and state governments, estimated at Rs 3,000–4,000 crore.
The challenge is further complicated by the risk of tax inversion. If medicines are taxed at 5 percent while the inputs used in their manufacture attract higher rates, pharmaceutical companies could accumulate unutilized input tax credits, affecting their cash flows and potentially increasing costs elsewhere in the supply chain. Policymakers are weighing whether the benefit to public health outweighs the fiscal impact and how best to structure the shift to avoid unintended economic consequences.
Agricultural Priorities and Tax Inversion Risks:
Tractors, another key item in the 12 percent slab, present a unique dilemma. As essential agricultural equipment, tractors cannot be shifted to the 18 percent slab without risking backlash from the farming community and increasing the cost of cultivation. At the same time, exempting tractors from GST altogether would mean producers cannot claim input tax credits, leading to tax inversion and higher production costs.
The current proposal under consideration is to exempt tractors from GST but without allowing input tax credit, thereby avoiding tax inversion. However, this approach is not without its critics. Some argue that it could disrupt the agricultural machinery market and have downstream effects on the broader rural economy. The government is under pressure to find a solution that protects farmers, maintains revenue neutrality, and avoids market distortions.
Revenue Neutrality and the Path Forward:
The broader goal of the GST Council’s rate rationalization exercise is to achieve revenue neutrality—ensuring that changes in tax rates do not result in significant losses or gains for the government. While there is agreement on removing the 12 percent slab, the estimated Rs 3,000–4,000 crore revenue loss from medicines and tractors must be offset by adjustments elsewhere in the tax structure.
Experts have highlighted the need for a phased approach and clear guidelines to ensure a smooth transition. There are concerns about potential inflationary impacts if semi-essential goods are moved to a higher bracket, as well as the risk of classification disputes during the transition. The Council is expected to consult with stakeholders and industry representatives before finalizing any changes.
As the GST Council prepares for its next meeting, the fate of the 12 percent slab—and the future of medicines and tractors within the tax regime—remains uncertain. The outcome will have far-reaching implications for consumers, businesses, and the government’s fiscal health, making it one of the most closely watched tax reforms in recent years.
