Medicines and Tractors Pose Challenges to Elimination of 12% GST Slab

Efforts to simplify India’s Goods and Services Tax (GST) structure by removing the 12% slab have gained momentum, as per a Moneycontrol news report. However, 2 key product categories, medicines and tractors, are complicating the process. Policymakers are weighing the financial and socio-economic implications of this proposed change.

Overview of the 12% GST Slab

The 12% Goods and Services Tax bracket has long been viewed as an intermediate slab that complicates compliance and disrupts revenue neutrality. As the government moves towards a streamlined 3-rate GST system: 5%, 18%, and 28% for demerit goods, the elimination of the 12% slab is under active discussion. However, this structural simplification comes with financial challenges, particularly due to the presence of essential items in this slab.

Key Categories Under Scrutiny: Medicines and Tractors

Medicines and tractors, both currently taxed at 12%, are central to the debate. The government aims to reclassify these without causing socio-economic disruption or tax inversion.

Medicines
Allopathic, ayurvedic, homoeopathic medicines, veterinary drugs, diagnostic kits, and surgical dressings would need to be moved to the 5% slab. However, this shift would significantly reduce tax revenue. Government sources estimate a ₹3,000 and ₹4,000 crore shortfall if these items move to the lower slab.

Tractors
As agricultural equipment, tractors cannot be taxed at 18%. The likely approach is to exempt them from GST without input tax credit (ITC), thereby preventing tax inversion and preserving affordability for farmers.

Understanding Tax Inversion

Tax inversion occurs when the GST rate on inputs is higher than the rate on the final product. This causes the accumulation of ITC that cannot be claimed back efficiently, affecting cash flows for manufacturers. In the case of tractors, exemption without ITC helps avoid this issue.

Revenue Recovery Challenges

To offset the revenue loss from eliminating the 12% slab, options like increasing GST on luxury goods have been considered. However, low consumption of high-end products such as premium footwear limits the feasibility of recovering ₹4,000 crore solely from this segment.

The government is exploring other sectors or goods that could bear a slightly higher tax burden without adversely affecting essential commodities or low-income consumers.

Read More: GST slab mergers are likely to be postponed! 

Healthcare and Agricultural Sensitivities

Shifting medicines to the 5% slab is a consumer-friendly move, but it adds strain on GST collections. For households, particularly those with limited income, any increase in medicine prices can impact access to healthcare.

For agriculture, tractors are not just another product; they are a fundamental part of farming infrastructure. Any rise in input costs due to taxation would burden the farming community and potentially disrupt the rural economy.

Conclusion

While there is general agreement on removing the 12% GST slab, essential goods like medicines and tractors remain contentious due to their socio-economic importance and potential revenue impact. A balance must be achieved between simplification of tax structure and protection of public interest, especially in healthcare and agriculture.

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