The long-discussed removal of the 12 percent GST slab is inching closer to becoming a reality, but not without challenges. While there’s general consensus on simplifying the Goods and Services Tax (GST) structure, two key categories—medicines and tractors—have emerged as sticking points that are delaying the move.
According to government sources, the 12% GST slab, which lies between the 5% and 18% brackets, has long been seen as a complicated mid-tier structure. Removing it could help streamline the tax regime and reduce compliance issues. The plan on the table is to adopt a simplified three-rate GST system: 5% for essentials, 18% as the standard rate, and 28% for demerit goods.
However, shifting all items currently taxed at 12% into the new structure poses fiscal and policy challenges. Medicines and tractors are the primary roadblocks, with states divided over the socio-economic consequences and revenue implications of moving them to other tax slabs.
Why Medicines and Tractors Are Holding Things Back
The government estimates a potential revenue loss of Rs 3,000–4,000 crore if these two categories are removed from the 12% bracket.
If medicines—including allopathic, ayurvedic, homeopathic, and veterinary drugs—are moved to the 5% slab, it would create a significant gap in tax collections. Additionally, diagnostic kits and surgical dressings would also fall under this lower tax rate, compounding the revenue impact.
“Medicines are at 12 percent, they will have to be moved to 5 percent, but that creates a revenue gap,” a government source told Moneycontrol. These items are essential for public healthcare, and taxing them at a higher rate could burden common people, particularly low-income households. Yet, reducing the tax without a backup plan threatens revenue neutrality.
As for tractors, the situation is even more complex. These are considered essential agricultural equipment, and raising their tax to 18% is off the table. Instead, the idea under consideration is to exempt them from GST altogether—but without allowing input tax credit (ITC).
This approach avoids tax inversion, a situation where the GST on inputs is higher than on the final product, leading to unused input tax credit. In such cases, producers face cash flow issues as they are unable to fully utilise or claim back the tax paid on raw materials or services used in production.
“Tractors can’t be put in 18 percent, so the only feasible option is to exempt them without ITC. That way, no ITC is claimed, and inversion is avoided,” the source added.
Balancing Revenue and Public Welfare
While most other items in the 12% category can be reallocated with relative ease, the challenge lies in ensuring the revenue loss is compensated elsewhere.
To balance the books, discussions were held around increasing GST rates on luxury goods such as high-end shoes and premium items. However, officials noted that low consumption in these segments limits their potential as revenue generators.
“On luxury goods like high-end shoes, it was discussed to increase tax to compensate for this revenue loss, but consumption is low and is not covering the Rs 4,000 crore gap,” the source explained.
This highlights a broader issue: How to reform the GST system without adversely impacting essential sectors like healthcare and agriculture?
Medicines are not just a commodity but a lifeline for millions of people, especially those relying on affordable healthcare. Any increase in retail prices due to tax adjustments could reduce accessibility and strain the healthcare system.
Similarly, tractors are vital for the agricultural economy. A tax hike here would mean higher input costs for farmers, potentially inflating food prices and impacting rural livelihoods.
The Bigger Picture
The debate around the 12% GST slab is more than just about numbers. It’s about finding the right balance between simplification and fairness. The current GST system, while comprehensive, is seen as complicated by many businesses and tax professionals.
A move to a three-rate GST structure—5%, 18%, and 28%—would simplify compliance, improve efficiency, and bring more transparency. But the transition needs to be handled delicately, especially when it comes to essential goods and services.
The government remains in deliberation, with the next GST Council meeting expected to revisit these issues, including a final decision on the fate of the 12% slab.
Until then, medicines and tractors will continue to be the central hurdles in India’s journey toward a simpler GST regime.
