The 56th GST Council meeting approved a simplified two-tier tax structure, scrapping old slabs, to make goods and services more affordable. The "Next-Generation GST Reforms" aim to boost consumption, support key sectors, and streamline the tax system for a more transparent Indian economy.
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The 56th meeting of the GST Council was held in New Delhi under the chairpersonship of the Union Finance & Corporate Affairs Minister Smt. Nirmala Sitharaman.
GST REFORM: SIGNIFICANCE, CHALLENGES AND WAY FORWARD
Rate Rationalisation: Two-Tier Tax Structure
The Council restructured the GST’s four-tier slab (5%, 12%, 18%, 28%) into a two-tier system, effective from September 22, 2025:
This simplification aims to reduce classification disputes and compliance costs, drawing inspiration from simplified tax systems in Australia and Canada, where fewer slabs enhance predictability.
Cheaper Items (Reduced to 5% or Nil)
Nil Tax (from 5%): UHT (Ultra High Temperature) milk, pre-packaged paneer, Indian breads (chapati, roti, paratha, pizza bread).
Reduced to 5% (from 12%/18%)
Food Sector: Condensed milk, cheese, dried fruits, namkeen, pasta, instant noodles, chocolate, coffee, butter, ghee.
Consumer Goods & Household: Hair oil, soaps, shampoos, toothpastes, tableware, kitchenware.
Health: Essential drugs, medical-grade oxygen, cancer drugs, micronutrients for fertilizers.
Automotive: Three-wheelers, ambulances, motorcycles (up to 350cc), small cars (petrol/CNG up to 1200cc, diesel up to 1500cc, length ≤4000mm), electric vehicles.
Agriculture & Renewables: Hand pumps, sprinklers, solar cookers, bio-gas plants, windmills.
Services: Hotel stays (≤₹7,500/day), beauty/wellness services, cinema tickets (≤₹100).
Costlier Items (Increased to 18% or 40%)
To 18% (from 5%/12%): Coal, lignite, peat, certain paper products, apparel/footwear above ₹2,500.
To 40% (De-merit Rate): Pan masala, aerated drinks, caffeinated beverages, luxury vehicles (SUVs, motorcycles >350cc, yachts), betting, gambling, lotteries.
Insurance: All individual health and life insurance policies (term, ULIP, endowment) and their reinsurance are now GST-exempt, promoting affordability and coverage expansion.
Trade Facilitation and Ease of Doing Business
Simplified Registration: An optional automated scheme grants GST registration within three days for small/low-risk businesses, effective November 1, 2025, benefiting 96% of applicants.
Provisional Refunds: 90% refunds for zero-rated supplies (exports) and inverted duty structure cases, operational from November 1, 2025, with refunds possible within seven days.
Low-Value Exports: Removal of the limit for GST refunds on low-value exports via courier/postal services.
RSP-Based Valuation: GST on pan masala, tobacco, and similar goods now based on Retail Sale Price, enhancing transparency.
Inverted Duty Structure (IDS) Correction
Fertiliser Sector: GST on Sulphuric acid, Nitric acid, and Ammonia reduced from 18% to 5%, addressing IDS and reducing input tax credit accumulation.
Textile Sector: Man-made fibre (MMF) value chain (polyester staple fibre, yarn, fabrics, garments <₹1,000) unified at 5%.
Economic Boost: A recent State Bank of India (SBI) report projected that the GST reform, along with income tax cuts, could increase household disposable income by ₹5.31 lakh crore, or 1.6% of GDP, by lowering rates on essential goods, consumer products, and vehicles.
Global Resilience: A stronger domestic market reduces reliance on external trade, countering global shocks like US tariffs.
Simplified Compliance: The two-tier structure minimises disputes and enhances predictability, aligning with global models like Australia’s GST.
Ease of Doing Business: Automated refunds and pre-filled returns reduce compliance costs.
Cooperative Federalism: The GST Council’s consensus-driven approach ensures state participation, though challenges persist due to revenue concerns.
Sectoral Impact: Manufacturing and retail sectors benefit from freed-up working capital (₹1.5–2 lakh crore), while MSMEs gain from lower compliance burdens.
Revenue Shortfall: States face an estimated ₹48,000–93,000 crore annual revenue loss, with Jharkhand (₹2,000 crore) and Jammu & Kashmir (10-12% reduction) hit hardest.
State Resistance: Opposition-ruled states (e.g., Kerala, Tamil Nadu) demand compensation, fearing fiscal strain on social programs.
Lagged Impact: Consumption benefits may take time, while tariff shocks hit immediately, risking short-term economic strain.
Implementation Gaps: Past GST reforms (e.g., 55th meeting’s Invoice Management System) faced delays due to consensus issues, a risk for the two-tier system.
Compensation Framework: Develop a phased revenue-sharing or transitional loan mechanism to stabilize state finances.
Targeted Relief: Provide fiscal support to exporters and MSMEs to bridge the lag in consumption benefits.
Export Diversification: Pursue new FTAs to enhance market access, aligning with ‘Make in India’ goals.
Policy Integration: Combine GST reforms with trade and industrial policies for resilience and competitiveness.
Continuous Feedback: Adapt reforms based on stakeholder input to ensure transparency and inclusivity.
Strengthen Digital Infrastructure: Enhance GSTN portals for seamless pre-filled returns and refunds, targeting a 50% reduction in compliance time by 2026 (NITI Aayog).
Consensus Building: Address state concerns through revenue-sharing models to strengthen cooperative federalism.
Sectoral Clarity: Issue clear guidelines for emerging sectors (e.g., drones, e-commerce) to reduce litigation, learning from Singapore’s model of real-time tax clarifications.
Public Awareness: Launch campaigns to educate MSMEs on simplified compliance, leveraging initiatives like the Sahyog Portal.
The GST reforms represent a bold step towards simplifying India's tax landscape, with a clear focus on boosting consumption and easing the burden on ordinary citizens and businesses.
Source: PIB
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PRACTICE QUESTION Q. Analyse the impact of GST rate rationalisation on India’s economic Growth. 150 words |
The GST Council moved from a four-tier to a two-tier tax slab structure (5% and 18%), with a special 40% rate for demerit goods.
GSTAT is a specialized body to resolve GST-related disputes, crucial for reducing litigation and ensuring a quick, expert resolution of tax issues.
It is when you pay more tax on the raw materials you buy than on the final product you sell, which creates a tax imbalance for businesses.
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