Proposed GST reforms promise deeper economic transformation; here's how

Prime Minister Narendra Modi has set the reforms bandwagon rolling again with the proposed GST cuts, which he called a Diwali ‘gift’ for the citizens. The bouquet of holistic GST reforms includes tax cuts on essential items to 5% from 12%, and 18% from 28%. But the proposed GST reforms are way beyond mere rate tinkering exercise and are designed in a way that they will alter the economy structurally, boosting the competitiveness of the Indian industry, and enhancing consumption in the economy along with the direct tax reprieve granted in the budget.

Rate rationalisation is just a part of the three pillar reforms proposed by the Union finance ministry to the GST Council—the apex GST decision making body. The three-pillar GST reforms proposals include, structural reforms, rate rationalisation, and ease of living. On August 20, finance minister Nirmala Sitharaman held a meeting with the group of ministers under the GST Council and said the Central government is committed to building consensus with states on the reforms. Later the Group of Ministers (GoM) on rate rationalisation has approved the rate related changes and the GST Council will meet on the September 3 and 4.

While tax rates have indeed taken away the spotlight, the three pillar reforms comprise a plethora of major changes to facilitate the businesses. “With the GST reforms, the government’s focus is to reinvigorate the core sectors of the economy,” said a source.

“Ever since the indirect tax reform was rolled out on July 1, 2017, revenue collection and tax base have gone up, and the need for reforms has been felt. Annual GST revenues touched ₹22.08 lakh crore in FY25, compared with ₹11.37 lakh crore in FY21,” said the source.

“The proposed three-pillar reform will address structural, rate-related, and compliance issues. Under structural reforms, the GST Council will be looking into the inverted duty structure and making the classification of goods simpler,” the source pointed out. The move will come as a huge reprieve to the industries facing issues due to IDS.

An inverted duty structure arises when the input tax rate is higher than the output tax rate. It has been a bane for sectors such as textiles, as fabric attracts 12% GST while tax on the finished garment is 5%. “On the compliance front, ease of compliance, and registration are key focus areas, with an aim to expand the tax base,” said the source. Yet another massive move that has been proposed and will ensure businesses do not face liquidity issues, is refund within three days. “Majority of refunds are being targeted to be provided in three days,” said another source.

On the rate front, the Centre has proposed a two-rate GST structure of 5% and 18%. The current GST slabs are 0%, 5%, 12%, 18% and 28%. A special slab of less than 5% will continue to promote employment-generating sectors, while a 40% slab has been proposed, comprising five to seven sin goods.

According to the proposals, 99% of items in the 12% slab will move to 5%, while 90% of the items in the 28% slab will move to 18%. Tax cuts will have a widespread impact on prices and are expected to boost consumption across sectors. For instance, GST on petrol cars less than four metres in length and having an engine capacity of less than 1,200 cc may come down to 18% from the current 28%. Also, GST on two-wheelers with an engine capacity of less than 350 cc may come down to 18% from 28%.

A Nomura report says GST rate rationalisation is likely to have a positive impact on tractors, which are currently taxed at 12% and could move to the 5% bracket, while ACs (28%) may benefit from a shift to 18%. “Food companies may also benefit as their tax may drop from 12% to 5%,” according to the report.

In all likelihood, GST reforms will stoke consumption in the economy, coming on the back of the tax relief on annual income of up to ₹12 lakh announced in this year’s Budget. With direct and indirect tax cuts, SBI Research pegs the combined fillip to the economy to the tune of ₹5.31 lakh crore. “The GST 2.0 regime, involving an average revenue loss of ₹85,000 crore, could boost consumption by ₹1.98 lakh crore. When taken together with the tax cut, the combined impact of both measures amounts to an additional ₹5.31 lakh crore of consumption expenditure in the economy. This translates into approximately 1.6% of GDP,” it says.

The moves will undoubtedly lead to consumption-led growth, and with more reforms in the pipeline, macroeconomic prospects are expected to improve further.

PM Modi, in his deliberations since the Independence Day has called for “speedy and comprehensive reforms that will enhance ease of living, improve ease of doing business, and foster inclusive prosperity”, according to a government release. “We are committed to speedy reforms across all sectors, which will boost ease of living, ease of doing business, and prosperity,” Modi said in a post on X earlier this month.