The GST Council’s efforts at rationalisation have steadily lowered the system’s complexity while sustaining revenue buoyancy
)
Listen to This Article
The 56th meeting of the Goods and Services Tax (GST) Council rationalised the current four-tier tax rate structure into a citizen-friendly ‘simple tax’ — a two-rate structure with a standard rate of 18 per cent and a merit rate of 5 per cent, along with a special demerit rate of 40 per cent for a select few goods and services. The changes in GST rates for all goods and services, except tobacco products, will be implemented with effect from September 22, 2025.
The GST Council’s efforts at rationalisation have steadily lowered the system’s complexity while sustaining revenue buoyancy. The effective weighted average GST rate, initially 14.4 per cent in 2017, had fallen to 11.6 per cent by September 2019, largely through slab adjustments and base expansion. With the current restructuring, it is projected to decline further to around 9.5 per cent.
The most striking element is the abolition of the 28 per cent slab, with commodities either shifted down to the 12 per cent bracket or moved into a sharply ring-fenced 40 per cent category for sin goods. While this recalibration is expected to entail a revenue foregone of approximately ₹48,000 crore, the wider economic benefits — such as lower deadweight losses, improved compliance incentives, and stronger consumption multipliers — are expected to offset the short-term fiscal cost. Thus, the issue of revenue foregone is a misnomer.
The past history of the GST rationalisation exercise in 2018 and 2019 shows similar results, with revenues initially dipping but adjusting to a significantly higher trend after a couple of months. Those critics predicting higher revenue losses may want to check past data.
Now, to those who argue why these GST reforms were not implemented on Day One: it is worth tracing the evolution of tax reforms in India, including the move to GST in 2017. Such historical evolution, with its various milestones, demonstrates that any changes in policy architecture —whether physical, institutional, or fiscal — require time to evolve, simplify, and stabilise.
To educate such critics, let us revisit India’s history of tax amendments. Revenue sharing between the Centre and states has a long history of change. The Constitution (Eightieth Amendment) Act, 2000, introduced a significant shift in the framework by redefining which central taxes are shareable with the states. Prior to this amendment, only specific taxes — such as income-tax and Union excise duties — were shared with states under Articles 270 and 272, respectively. The amendment replaced the earlier Article 270 and deleted Article 272, thereby consolidating the pool of taxes to be shared with states, though with some exceptions as specified under Articles 268, 269, and 271.
In 2016, the Constitution (101st Amendment) Act ushered in a new era of tax reforms through GST and a new method of revenue sharing. The amendment replaced various central and state taxes such as excise duty, service tax, sales tax, entry tax, and entertainment tax with GST.
According to the Act, the Centre levies central GST (CGST) and the states levy state GST (SGST) on the supply of goods and services within a state. For integrated GST (IGST), it is collected by the Centre and apportioned between the Union and states against input credit utilisation, with residual balances distributed on an ad hoc 50:50 basis.
The GST Council recommends the tax rates for CGST, SGST, and IGST. The tax rates for CGST and SGST each cannot exceed 20 per cent. Crucial to enabling such bold restructuring was also the design of the compensation mechanism for states, which ensured that states were more than compensated for revenue losses during the transition to GST (estimates suggest states may have received ₹63,000 crore more than the perceived revenue loss).
Since then, the GST Council has done an admirable job, and the culmination of five rates into two is the result of hard work across the Centre and all 28 states moving together in unison. India’s GST tax structure is a lesson in true fiscal federalism for the entire world, with all decisions taken unanimously to ease the cost of living for households and businesses. In effect, the trajectory of India’s tax reforms, including GST, exemplifies this principle: simplification is evolutionary, not instantaneous.
Coming back to the benefits of the new GST regime: firstly, households directly benefit from lower effective tax rates on essentials, particularly food and clothing, which have been shifted from 12 per cent to 5 per cent. This rate cut is expected to lower retail prices and moderate the inflation passthrough in these categories by 25–30 basis points. Combined with reduced levies on services, the direct impact on headline Consumer Price Index inflation is more than 1 per cent from the current level. Such moderation in inflation expectations directly improves household real disposable incomes and provides greater headroom for consumption.
Secondly, the ₹48,000 crore revenue foregone is a misnomer, as it effectively translates into a positive disposable income effect, amounting to an estimated ₹1.1 trillion consumption boost, or nearly 0.3 per cent of gross domestic product.
Thirdly, businesses are significant beneficiaries of a more predictable tax architecture. Fewer slabs reduce classification disputes and litigation, lower compliance costs, and ease working capital management through more efficient input tax credit flows.
Fourthly, on the fiscal front, the impact on the fiscal deficit will be minimal. Despite lower nominal rates, the broadening of the base, removal of distortions, and higher compliance will strengthen tax buoyancy. This underscores a fundamental principle in public finance: a well-designed tax system can achieve both efficiency and equity without sacrificing revenue adequacy.
Fifthly, in banking, rationalisation translates into meaningful reductions in non-interest expenses. By lowering operating expenses, the reform improves profitability and creates fiscal space for banks and insurers to expand outreach, innovate products, and deepen financial inclusion. Insurance companies, meanwhile, stand to benefit from improved affordability of policies, which is expected to boost penetration rates in life and health segments.
Seen in its entirety, GST 2.0 is not simply a technical adjustment in rates but a structural reset of India’s indirect tax regime. It provides immediate dividends through lower inflation, higher disposable incomes, and a stimulus to aggregate demand, while promising longer-term efficiency gains through reduced compliance costs and greater buoyancy. GST 2.0 is therefore best viewed not as a culmination but as a milestone in the continuing process of reform.
The writer is Member, 16th Finance Commission; Member, PMEAC; and Group Chief Economic Advisor, State Bank of India. Views are personal
aniltikotekar4sme.com 