New Delhi, Aug 15 (PTI) The central government has proposed two tax rates of 5 per cent and 18 per cent in the revamped Goods and Services Tax (GST), slated to replace the current indirect tax regime by Diwali this year, highly placed sources said.

The Centre has sent its proposal, which removes 12 and 28 per cent slabs, to the panel of state finance ministers on GST rate rationalisation. They will now discuss it and place it before the GST Council. The council is expected to meet next month.

While nil or zero per cent GST is charged on essential food items, 5 per cent is charged on daily use items, 12 per cent on standard goods, 18 per cent on electronics and services and 28 per cent on luxury and sin goods, the revamped GST regime will have two slabs plus a special rate of 40 per cent for luxury and sin goods, sources said.

When the revamped structure is approved by the GST Council, 99 per cent of items in the current 12 per cent slab will move to the 5 per cent bracket. Similarly, almost 90 per cent of goods and services that are currently charged at 28 per cent would shift to an 18 per cent tax rate.

The special rate of 40 per cent would be levied on only about 7 items, sources said, adding tobacco would also fall under this rate, but the total incidence of taxation would continue at the current 88 per cent.

Online gaming is also likely to be treated as a demerit goods category and attract the highest tax rate.

As many as 8 sectors -- textiles, fertiliser, renewable energy, automotive, handicrafts, agriculture, health and insurance -- will benefit the most from the GST rate overhaul as per the Centre's proposal for ushering in the next generation GST reform.

The revamped GST is expected to give a big boost to consumption, offsetting the revenue loss that may occur from the rate revision, they said.

"There will be a gap in revenues because of the rejig, but the revenue will be offset in the next few months," a government source said, adding that the new slab structure would be implemented by the early third quarter.

Under the present GST structure, which came into being after central and state levies were subsumed beginning July 1, 2017, the highest 65 per cent tax collections happen from the 18 per cent levy. The top tax bracket of 28 per cent on luxury and sin goods contributes 11 per cent of the revenue, while the 12 per cent slab accounts for just 5 per cent of the revenue.

The lowest 5 per cent levy on essential daily-use items contributes 7 per cent of the total GST kitty.

High labour-intensive and export-oriented sectors like diamonds and precious stones would continue to be taxed as per the existing rates.

Elaborating on the timing for reforms, sources said "piecemeal GST rate changes" could not have happened now, as the compensation cess, which is levied on luxury and demerit goods, was coming to an end once the repayment of the borrowed loans is complete.

Also, multiple GST rates in the supply chain were leading to evasion as fraudsters were generating fake invoices to claim input tax credit.

Under the GST law, a maximum of 40 per cent tax can be levied on goods and services. PTI JD JD BAL BAL

GST rate rationalisation proposes two simplified slabs plus a special demerit goods rate, reshaping indirect tax incidence. The proposal consolidates GST into two main slabs-a lower consumption slab and a standard slab-eliminating intermediate rates and adding a special high rate of 40 per cent for a limited number of demerit and luxury goods (including tobacco and likely online gaming). It foresees most items from repealed slabs shifting into the two primary rates, expects short-term revenue gaps to be offset by consumption recovery, aims to curb evasion from multiple rate supply chains, and notes the nearing end of the compensation cess scheme.