The Goods and Services Tax (GST) in India is set for a major reform in September 2025. The reform aims to simplify the GST rate structure by reducing multiple slabs to just two main rates. This move is expected to boost consumption and ease costs amid a complex economic environment. The changes come at a critical time when inflation is low, interest rates have been cut, and exports face new challenges.
Recent GST Rate Rationalisation
The GST Council plans to reduce the number of tax slabs from several to two primary rates. Goods and services currently taxed at 28% will mostly move to 18%, and those at 12% will shift to 5%. Sin goods may see an increase to 40%. This rationalisation is designed to simplify taxation and encourage spending by lowering prices on many items.
Impact on Consumption and Demand
Lower GST rates will increase disposable income by reducing consumer prices. This is expected to stimulate demand in both rural and urban markets. The reform coincides with the festive season, traditionally a peak time for spending in India. The combined effect of tax cuts, lower inflation, and reduced borrowing costs may create a strong consumption boost.
Effect on Exports and Industry
India’s exports to the USA now face a 50% duty. Cutting GST on inputs will help exporters reduce costs and remain competitive. Small and medium enterprises (SMEs) in sectors like textiles, leather, and precious stones may benefit from lower GST on inputs. However, tariff barriers pose challenges for these industries, requiring further government support beyond GST reforms.
Government Revenue and Fiscal Management
The reduction in GST rates will lower government revenue in the short term. However, this loss may be offset by increased consumption and economic growth. The government has recently received a windfall from RBI dividends, which can buffer revenue losses. Sustained GDP growth above 6.5% is needed to maintain tax collections in the medium term.
Broader Economic Context
Inflation has eased, and inflation expectations are subdued. Interest rates have been cut by 100 basis points since February 2025, reducing borrowing costs. These factors, combined with GST rate rationalisation, create favourable conditions for economic expansion. However, external tariff barriers and global uncertainties may cause short-term volatility.
Potential Sectoral Benefits
Automobiles and housing are expected to be the biggest beneficiaries. The GST cut on vehicles from 28% to 18% and lower input costs for construction materials like steel and cement could reduce prices and boost demand. This may lead to increased sales and investment in these sectors, supporting broader economic growth.
Future Outlook
While immediate effects are positive for households, the economy faces challenges from external tariffs and global trade tensions. The taxable base must expand through increased consumption and production. Continued reforms and government support will be crucial to sustaining growth and ensuring fiscal stability in the coming years.
Questions for UPSC:
- Critically analyse the impact of GST reforms on India’s fiscal federalism and state finances with suitable examples.
- Explain the role of tax rationalisation in boosting consumption demand and economic growth in emerging economies.
- What are the challenges posed by external tariff barriers on exports? How can domestic policy reforms mitigate their effects?
- Comment on the relationship between inflation control, interest rate policy, and consumer spending in the context of economic reforms.
