According to a Moneycontrol report, efforts to scrap the 12 percent Goods and Services Tax (GST) slab have run into resistance, with medicines and tractors emerging as key sticking points due to their socio-economic impact and potential revenue implications.
Sources told Moneycontrol that while there is consensus to eliminate the 12 percent GST bracket entirely, states are grappling with the potential revenue loss, estimated at Rs 3,000–4,000 crore, particularly if essential items like medicines and tractors are shifted to lower or exempted tax brackets.
In order to rationalise the GST structure, most items under the 12 percent slab are proposed to be shifted either to the 5 percent or 18 percent categories. However, Moneycontrol reports that medicines—including allopathic, ayurvedic, homeopathic, veterinary drugs, diagnostic kits, and surgical dressings—pose a revenue risk if moved to the 5 percent slab. This change would add significantly to the shortfall.
According to Moneycontrol, tractors also complicate the equation. As agricultural equipment, they cannot be taxed at 18 percent, and the prevailing recommendation is to exempt them altogether—without input tax credit (ITC)—to avoid tax inversion. Tax inversion, as explained in the report, occurs when the tax rate on inputs is higher than on final goods, leading to unutilised ITC and affecting business cash flow.
A government official told Moneycontrol, “There is consensus on removal of the 12 percent slab, but a Rs 3,000-4,000 crore revenue loss has to be made up from some other items. Most items can be moved out, but these two – medicines and tractors – are the sticking point.”
To bridge this gap, the GST Council has considered increasing taxes on luxury items like high-end footwear and premium goods. But Moneycontrol cites government sources as saying that the low consumption in these segments means they cannot compensate for the anticipated shortfall. “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 said.
As per Moneycontrol, this creates a delicate balancing act for the Council. Medicines are considered essential and a hike would impact affordability and accessibility, especially for low-income families. Tractors are similarly vital for the agricultural sector and any cost escalation would burden farmers.
The long-standing goal of GST reform is to simplify the rate structure. According to Moneycontrol, a three-rate structure—5 percent, 18 percent, and 28 percent (for demerit goods)—remains under serious consideration, but reconciling it with economic realities remains challenging.
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