GST Council to Decide on 5% EV Tax and Rate Restructuring

The Centre is poised to push for a 5 per cent tax on electric vehicles (EVs) as part of its ambitious revamp of the Goods and Services Tax (GST) that aims to reduce rates on everyday items ranging from butter to electronics. The powerful GST Council, chaired by Union Finance Minister Nirmala Sitharaman and composed of finance ministers from all states, will take up the proposal in a two-day meeting starting Wednesday.

The Centre’s ‘next-gen’ GST reform blueprint seeks to streamline the current four-tier system into just two slabs of 5 and 18 per cent, shifting most goods from the existing 12 and 28 per cent bands to lower rates. A special 40 per cent rate has also been mooted for certain demerit goods, PTI reported.

While the trimming of tax slabs and the anticipated drop in consumer prices have been widely welcomed, opposition-ruled states are pressing for compensation to cover potential revenue shortfalls from the rejig.

The GST framework, rolled out on July 1, 2017, replaced a patchwork of state and central levies with a uniform structure of 5, 12, 18 and 28 per cent. To offset state revenue losses, a compensation cess ranging from 1 to 290 per cent was imposed on luxury and demerit goods. That mechanism ended in June 2022, leaving states more vulnerable to revenue swings.

Prime Minister Narendra Modi, in his Independence Day address on August 15, unveiled the proposal for a major GST overhaul. The Centre shortly shared a blueprint with a Group of Ministers (GoM) from various states, which broadly agreed to do away with the 12 and 28 per cent slabs to ease the burden on consumers. The GoM’s recommendations will now be formally deliberated by the Council on September 3 and 4.

Sources told news agency PTI that the GoM, while backing a slab restructuring, suggested that EVs priced up to Rs 40 lakh should draw 18 per cent GST. The Centre, however, remains committed to pushing a 5 per cent levy to promote uptake, and will argue for this at the Council meeting.

If endorsed, commonly used food items such as ghee, nuts, bottled drinking water, namkeen, medicines, medical devices, certain footwear and apparel could move from 12 per cent to 5 per cent GST. Everyday products like pencils, bicycles, umbrellas and hairpins may also be shifted to the 5 per cent bracket.

Prices of electronic goods, including particular categories of TVs, washing machines and refrigerators, could fall as they move from 28 per cent to 18 per cent tax. Automobiles, now taxed at 28 per cent plus cess, may see differentiated rates, with entry-level cars taxed at 18 per cent and SUVs and luxury cars at 40 per cent.

The proposed 40 per cent rate will also cover demerit items such as tobacco, pan masala and cigarettes, with provision for an additional levy on top of this. Opposition states like West Bengal have demanded that any extra levy on these products be earmarked solely for state compensation.

Eight opposition-ruled states – Himachal Pradesh, Jharkhand, Karnataka, Kerala, Punjab, Tamil Nadu, Telangana and West Bengal – are expected to convene ahead of the Council session to finalise their approach. They assert that fewer slabs and reduced rates will dent their revenues, while the Centre argues that lower prices will boost consumption and recoup most of the loss over time.

Sources said the Centre is also aware of revenue consequences but maintains that the proposed GST overhaul will limit disruption while easing compliance burdens for businesses. Nearly 99 per cent of items currently in the 12 per cent slab are expected to move to 5 per cent, while 90 per cent of items in the 28 per cent slab will shift to 18 per cent.