In a significant development seven years after the rollout of the Goods and Services Tax (GST), a new special rate of 35% is being proposed for demerit goods such as aerated beverages, cigarettes, and tobacco products. This marks the first major restructuring of tax rates under the GST framework.
The proposal, finalized by the Group of Ministers (GoM) on rate rationalization at a meeting on Monday, will be presented at the GST Council meeting scheduled for December 21 in Jaisalmer. Alongside the sin goods tax hike, the GoM has recommended a series of rate adjustments for over 148 items, including readymade garments, officials said.
Sin Goods Tax Hike
The proposed 35% rate for sin goods, up from the current highest slab of 28%, aims to offset revenue losses resulting from potential rate cuts on essential items. “This special rate will help minimize the impact of revenue loss from other rate changes,” a state finance minister on the GoM stated.
New GST Structure for Readymade Garments
The GoM, led by Bihar Deputy Chief Minister Samrat Choudhary, has suggested:
- 5% GST for garments priced up to ₹1,500.
- 18% GST for garments priced between ₹1,500 and ₹10,000.
- 28% GST for garments costing above ₹10,000.
Luxury Goods and Rate Adjustments
The GoM has also proposed higher GST rates for luxury items such as cosmetics, watches, and high-end shoes. Shoes priced above ₹15,000 and wristwatches costing over ₹25,000 may be shifted to the highest slab of 28%, aligning taxation with product pricing and targeting luxury buyers.
Health and Life Insurance Premiums
The GST Council will also review proposals on insurance premiums:
- Exemption for premiums paid by senior citizens for health insurance.
- Exemption for health insurance premiums up to ₹5 lakh for other citizens, with the current 18% rate applying to amounts above ₹5 lakh.
- Term life insurance premiums are also likely to be exempted.
Other Proposed Rate Changes
At its October meeting, the GoM recommended reducing GST on:
- Packaged water (above 20 liters) from 18% to 5%.
- Bicycles priced below ₹10,000 from 12% to 5%.
- Exercise notebooks from 12% to 5%.
Compensation Cess Discussions
Separately, the GoM on compensation cess, chaired by Minister of State for Finance Pankaj Chaudhary, has sought a six-month extension to finalize its report. The cess, levied on sin and luxury goods such as cars and tobacco, was extended until March 2026 to repay ₹2.69 lakh crore in loans taken to cover states’ revenue losses during the pandemic.
The GST Council’s December 21 meeting will focus on these critical reforms, potentially reshaping India’s indirect tax structure for the medium term.