GST Rate Cuts: Will the Categorization Affect Your Savings?

The upcoming 56th GST Council meeting in New Delhi on 3–4 September is set to discuss significant changes in the GST structure. The key agenda includes widening the nil-rate slab, merging the rates, and reducing GST on various items that are currently taxed at 18%. These changes come just in time for the festive season and promise to offer savings on everyday products, but there’s a catch—how these products are categorized will determine the impact on your final bill.

What’s Changing in GST?

The government is considering major reforms to make the Goods and Services Tax (GST) structure more streamlined. If approved, many household essentials will likely fall under the nil-rate category, leading to potential price cuts. Items like UHT milk, pre-packaged paneer (chena), pizza bread, khakhra, chapati, roti, and frozen products such as paratha and parotta, which were previously taxed at 18%, are under review for zero taxation.

Challenges in GST Categorization

While the idea of reducing GST slabs is promising, the real challenge lies in the categorization of goods under GST. Experts argue that the current HSN (Harmonized System of Nomenclature) codes and technical descriptions don’t always align with how products are sold in the market, leading to confusion and ambiguity.

Amit Baid, Head of Tax at BTG Advaya, explains, “The disconnect between technical codes and practical trade terminology causes major confusion. A product could be taxed at 5%, 12%, or 18% depending on how it’s categorized.”

Confusing Tax Rates for the Same Product

One of the main issues with the current GST structure is that the same product may attract different tax rates based on its description. Here are a few examples that illustrate this confusion:

• Popcorn: Loose corn = 5%, packaged salty popcorn = 12%, caramelized popcorn = 18%. Same corn, different taxes!
• Fruit drinks: A mango drink is taxed at 12%. But when you add fizz, the rate jumps to 28% + 12% cess (total of 40%).
• Ice cream: 5% GST if served as a dessert in a restaurant, but 18% if bought from an ice cream parlour.
• Parathas vs Roti: Roti = 5%, but frozen paratha is often classified as ‘ready-to-eat’ and taxed at 18%.
• SUVs: Same car model may attract 28% GST + 22% cess if ground clearance is above 170mm. A few millimeters can change your tax rate!

Impact on Small Businesses

Such inconsistent categorization has a disproportionately high impact on small businesses. They struggle to absorb extra costs or pass them onto consumers like large corporations can. For small businesses, misclassification of products can lead to severe penalties, interest, and even litigation.

Baid highlights the dilemma small business owners face with products like fruit drinks. A mango drink attracts 12% GST, but the same drink becomes an ‘aerated beverage’ if carbonated, pushing the tax rate to 40%. Small sellers may struggle to identify these distinctions, and the consequences can be financially damaging.

Simplifying GST: What Needs to Change?

Experts argue that a simpler, more transparent GST system would benefit consumers and businesses alike. Baid suggests adopting a guiding principle of “one product, one rate.” This would prevent unnecessary tax discrepancies due to minor differences in product descriptions. He also recommends creating a common database of advance rulings, which would help clarify issues and make GST rules more predictable.

“There is a need for clearer, sector-specific guidelines in simple language. Also, a central database for GST rulings would help avoid confusion arising from divergent state rulings,” Baid adds.

Beyond Rate Cuts: What’s Needed for True GST Simplification?

While reducing GST slabs may seem like an immediate relief, experts believe that without a proper redefinition of product categories, the root cause of tax-related confusion will remain. According to Baid, “Reducing slabs from 5 to 3 is just a temporary fix. The real issue lies in product definitions. Cleaning the floor without fixing the leaking tap is futile.”

The GST rationalization process will lead to mixed results in the short term. Some products may become cheaper, while others could become costlier depending on the final tax slab. However, the long-term benefits of a simplified system—such as reduced classification disputes, lower compliance costs, and consistent pricing—will outweigh the initial hurdles.

Conclusion: Long-Term Benefits of Simplified GST

As the government works towards simplifying GST, the goal should be to create a tax structure that feels fair, transparent, and aligned with the real-world consumer experience. For businesses, simplified tax definitions will reduce compliance costs and enable them to reinvest in operations, helping drive growth. For consumers, simplified GST means lower prices and a system that works in their favor.

With ongoing GST reforms and categorization changes, we can expect an easier, more predictable system in the future.