The Goods and Services Tax (GST)) Council on Friday slashed rates across the board, including for a range of daily items of consumption, relaxed penalties and tweaked rules to make it easier for businesses, especially small and medium enterprises, to comply.

The feel-good package from the council, which comes into effect from 15 November, is likely to boost consumer demand, reduce disquiet over compliance costs and also lend fresh momentum to the tax reform initiative.

Prime Minister Narendra Modi took to Twitter and said, “All our decisions are people-inspired, people-friendly and people-centric. We are working tirelessly for India’s economic integration through GST."

It is one of the biggest packages concessions announced after the new indirect tax system took effect on 1 July.

The tax reductions will, however, result in a revenue loss of about Rs20,000 crore a year, four people who attended the council meeting said.

A state finance minister explained that buoyancy in GST revenue had given the council the fiscal cushion to undertake the cuts. “The revenue loss of states has come down from 28% to 17% in August. This has emboldened the council to cut rates and take the hit," the person said.

The biggest rationalization was the decision to cut the tax rate on 178 items from 28% to 18%, leaving only 50 items in the highest tax slab and offering major relief to consumers and businesses.

“There was unanimity that in the 28% slab, there should only be the so called sin and demerit goods (the consumption of which is discouraged through high tax rates). So, today the council took a historic decision to retain only 50 items in the highest slab and to bring down the rate on the rest to 18%," said Bihar deputy chief minister Sushil Kumar Modi..

The tax rate was reduced on a range of goods, from granite and marble to chewing gum and chocolates, deodorants and detergents.

Vivek Gambhir, managing director and CEO of Godrej Consumer Products Ltd, said in an email statement, “We remain committed to making our products more affordable and accessible for the mass population, thereby driving consumer demand. In many of our categories, penetrating rates are low and so, the headroom for growth is significant."

Jammu and Kashmir finance minister Haseeb Ahmed Drabu said that tax rate rationalization was a continuous process and that, eventually, further rate cuts may be possible. West Bengal finance minister Amit Mitra said his government had pitched for retaining only tobacco and big luxury items in the highest tax slab.

In other relief measures, the council also decided to bring more units within the scope of a special tax payment window for small and medium enterprises (SMEs) called the composition scheme and halved the tax rate allowed under it to 1%. The eligibility threshold for the scheme too has been raised to Rs1.5 crore from Rs1 crore now.

The council sought to tackle two major factors that gave GST a bad name—the practice of restaurants not passing on to consumers the benefit of tax rebates that they got in the new system and the rigours of compliance that big and small businesses faced.

Accordingly, the GST rate on restaurants has been slashed to 5% for all restaurants except those in the category of five-star hotels where the tax rate remains 18%. However, benefit of tax rebates is restricted to the 18% category.

The response to this move was, however, mixed. “Effectively the consumer pocket will get a marginal benefit and not as it seems. This move is also retrograde to bringing in players in the organized segment. In fact, restaurants are like the ‘gatekeepers’ which have worked with suppliers to bring them into the formal economy," said Rahul Singh, vice-president, National Restaurant Association of India. Singh is also founder and CEO, The Beer Cafe.

Sounak Mitra and Soumya Gupta contributed to this story.

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