The Goods and Services Tax (GST) Council of India introduced major reforms in September 2025. The changes simplify the tax structure by reducing the number of GST slabs and lowering rates on most goods. This move aims to boost consumption and economic growth amid global trade challenges. The reforms follow a long process involving the Group of Ministers (GoM) and the Centre’s active role.
Background and Recent Developments
The GST rate rationalisation had been under discussion since 2021. A GoM, formed solely of state representatives, showed limited progress initially. The Union government intervened with proposals in August 2025. After acceptance by the GoM, the GST Council held a prolonged meeting on 3 September 2025 and approved the reforms. The changes were announced as a Deepavali gift by Prime Minister Narendra Modi.
Key Changes in GST Structure
The existing GST rates of 0%, 5%, 12%, 18%, 28%, and compensation cess have been reduced to four main slabs – 0%, 5%, 18%, and 40%. The compensation cess is mostly removed except for tobacco products, which will see cess removal by year-end after loan repayment. Most items have seen rate cuts, with 91% of 453 items becoming cheaper. Common products moved from 12% to 5%. Some luxury goods moved from 28% to 40%, but effective tax incidence is lower due to cess removal.
Sector-wise Impact
Healthcare welcomed the reduction from 12% to 5%, benefiting patients directly. Renewable energy components also became cheaper, aiding the clean energy transition. Consumer appliances and real estate sectors expect cost reductions and demand boosts. Auto manufacturers see potential sales growth with lower GST on cars and non-luxury bikes. Textile industry appreciated lower rates on fibres but criticised higher rates on expensive garments. Airlines and vegetable oil producers expressed concerns over certain rate increases and unresolved inverted duty structures.
Reasons Behind the Reforms
The legal limit for GST compensation cess ends by March 2026 or earlier upon loan repayment. The government expects to repay this loan in 2025, necessitating cess removal. Without rate cuts, sin goods like tobacco would become cheaper, which the government wants to avoid. The reforms also aim to counter possible economic slowdown due to US tariffs on Indian exports. Despite official denial, the rate cuts are expected to support growth.
Revenue and Fiscal Implications
The Centre estimates a revenue loss of ₹48,000 crore based on 2023-24 consumption. SBI research suggests a smaller impact of ₹3,700 crore. Opposition states worry about revenue shortfalls and demand a cess on the new 40% slab items for compensation. The Council rejected this. States may rely on the 16th Finance Commission and other sources to cover losses. The overall fiscal impact will become clearer with new consumption data.
Challenges and Industry Concerns
Auto dealers fear delayed purchases until new rates take effect. Insurance sector faces mixed outcomes due to GST exemption on some policies but loss of input tax credits. MSMEs oppose the hike in labour GST from 12% to 18%, fearing cost increases. Airlines criticise higher GST on premium seats. The reforms simplify GST but also bring transitional challenges for some sectors.
Questions for UPSC:
- Taking example of India’s GST reforms, discuss the challenges and benefits of tax rate rationalisation in a federal structure.
- Examine the impact of indirect tax changes on different sectors of the economy with suitable examples from recent GST reforms.
- Analyse the role of cooperative federalism in GST Council decisions and how it affects Centre-State fiscal relations.
- Discuss in the light of India’s GST reforms how global trade policies, such as tariffs, influence domestic fiscal policy and economic growth.
