GST Slab Rationalisation: Economic Impact, Challenges and Way Forward

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Picture Courtesy:  Financial Times

 Context

Recent GST 2.0 reforms are aimed at simplifying the tax structure, boosting compliance, and impacting various sectors differently depending on specific changes to rates, exemptions, or administrative processes. 

Key Outcomes of GST 2.0 Reforms

The 56th GST Council introduced a simplified tax structure and targeted reliefs to make goods and services more affordable while enhancing business efficiency.

Two-Tier Tax Structure

• Replaced the four-slab system (5%, 12%, 18%, 28%) with two main slabs: 5% (merit rate) for essentials and 18% (standard rate) for others.
• A 40% demerit rate applies to luxury and sin goods like tobacco and high-end vehicles. This reduces classification disputes and aligns with global models like Australia’s GST.

Tax Relief for Essentials

• Essential goods like UHT milk, paneer, and Indian breads (chapati, roti) now carry 0% GST, down from 5%.
• Health and life insurance premiums are also fully exempt, making them more affordable.

Consumer Goods and Automotive

• GST on small cars (petrol/CNG ≤1200cc, diesel ≤1500cc, length ≤4000mm), motorcycles (≤350cc), and consumer durables like TVs and air conditioners dropped from 28% to 18%.
• Renewable energy devices (e.g., solar cookers) reduced from 12% to 5%.

Healthcare Boost

• GST on 33 lifesaving drugs and three critical drugs for cancer and rare diseases reduced to 0% from 12% and 5%, respectively.
• Medical-grade oxygen and spectacles now attract 5% GST.

Agricultural Support

• GST on tractors, harvesters, and fertilizer inputs (e.g., sulphuric acid, ammonia) slashed from 18% or 12% to 5%, supporting rural economies.

Trade and Compliance Ease

• The Goods and Services Tax Appellate Tribunal (GSTAT) will be operational by December 2025, speeding up dispute resolution.
• Automated refunds (90% provisional) for exports and inverted duty cases start November 1, 2025.
• Simplified registration for small businesses ensures approval within three days.

Inverted Duty Structure Fix

• Sectors like textiles (man-made fibres) and fertilizers now have unified 5% GST rates across their value chain, freeing up working capital estimated at ₹1.5–2 lakh crore.

Significance of GST 2.0 for Indian Economy

GST 2.0 builds on the GST, launched in 2017 via the 101st Constitutional Amendment Act, which unified multiple indirect taxes into a single, destination-based tax.

Economic Growth: A State Bank of India report estimates that GST 2.0, combined with income tax relief, will increase household disposable income by ₹5.31 lakh crore (1.6% of GDP), boosting consumption.

Simplified Compliance: The two-tier structure reduces disputes over product classification, saving businesses time and costs.  

Sectoral Impact: Lower taxes on consumer goods, vehicles, and renewables drive demand in manufacturing and retail. MSMEs benefit from simplified registration and the composition scheme.

Cooperative Federalism: GST Council’s consensus-driven decisions, involving the Centre and all states, showcase India’s federal strength, though revenue concerns persist.

Global Resilience: By reducing reliance on external trade through stronger domestic demand, GST 2.0 counters global economic shocks, such as US tariffs.

Challenges in Implementing GST 2.0

Revenue Loss: The reforms may cause a ₹48,000–93,000 crore annual revenue shortfall, with states like Jharkhand (₹2,000 crore loss) and Jammu & Kashmir (10–12% reduction) hit hardest. Opposition-ruled states like Kerala and Tamil Nadu demand compensation.  

State Resistance: States fear fiscal strain on social programs due to reduced revenue, complicating consensus. Past reforms, like the 55th meeting’s Invoice Management System, faced delays due to similar issues.

Implementation Gaps: Technical glitches in the GST Network (GSTN) during peak filing periods and disparities in digital literacy among MSMEs could delay benefits.

Lagged Economic Impact: Consumption benefits may take months to materialize, while tariff shocks hit immediately, risking short-term economic strain.

Excluded Sectors: Petroleum, alcohol, and real estate remain outside GST, causing cascading taxes and limiting input tax credit benefits.

Way Forward 

Revenue Compensation: Create a transitional loan or revenue-sharing mechanism to support states, ensuring fiscal stability for social programs.

Include Excluded Sectors: Bring petroleum and alcohol under GST to eliminate cascading taxes and harmonize prices, as recommended by the 15th Finance Commission.

Strengthen GSTN: Upgrade GSTN infrastructure to handle peak loads and integrate with platforms like Customs ICEGATE for seamless data sharing.  

Fast-Track GSTAT: Fully operationalize the GST Appellate Tribunal by December 2025 to clear the backlog of 8,100+ cases, ensuring faster dispute resolution.  

Public Awareness: Launch campaigns via the Sahyog Portal to educate MSMEs on simplified compliance, drawing from Singapore’s real-time tax clarification model.  

Policy Integration: Align GST reforms with trade policies and free trade agreements to boost exports, supporting “Make in India” goals.

Conclusion

GST 2.0 marks a bold step toward a simpler, citizen-centric tax system, reducing costs for essentials, boosting consumption, and easing business compliance. However, addressing revenue shortfalls, state concerns, and technical gaps is critical to realizing the vision of “One Nation, One Tax.”  

Source: Financial Times