As India prepares for its most significant GST overhaul since 2017, here’s how the tax reform evolved—and what the upcoming changes could mean for households, MSMEs, and state finances.
A Reform Seven Years in the Making
Launched on July 1, 2017, the Goods and Services Tax (GST) marked a historic unification of India’s fragmented indirect tax system. Seven years later, as Prime Minister Narendra Modi announces a new wave of reforms set for Diwali 2025, the country stands at the cusp of GST 2.0.
- From a multi-layered patchwork of VAT, service tax, excise, and cesses, GST has evolved into a digital-first, destination-based tax.
- Yet, rate complexity, compliance challenges, and revenue concerns have persisted—setting the stage for the upcoming rationalisation.
What’s Changing: Simpler Structure, Lower Taxes
The proposed Diwali reforms aim to collapse the current 7-slab structure into just 4 tax tiers:
- <1% for precious metals
- 5% for essentials and mass-use items
- 18% as the standard rate
- 40% for sin goods (tobacco, alcohol, etc.)
This overhaul would:
- Shift many goods from 18% to 5%, easing household budgets
- Simplify compliance by reducing rate disputes and classification issues
- Reflect a broader push toward GST efficiency and equity
Revenue Implications: A Balancing Act for Centre and States
Economists estimate the changes could lead to an annual revenue hit of ₹1.1–1.8 trillion. While the Centre can absorb part of this, thanks to a record ₹2.69 trillion RBI dividend, states may feel more pressure.
- With the GST compensation mechanism ending in 2022, states like Kerala have sought new safeguards.
- The compensation cess now only services past borrowings, and will expire by March 2026.
- Sustaining revenues will depend on:
- Widening the tax base
- Reducing evasion
- Driving digital compliance
GST: The Foundation and Evolution
Rooted in the 101st Constitutional Amendment (2016), GST was designed to:
- Eliminate tax cascading
- Create a common market
- Simplify compliance
Backed by reports like the Kelkar Task Force (2005) and the CEA’s RNR Committee (2015), GST became reality in 2017, starting with:
- CGST, SGST, and IGST structures
- A five-year compensation plan to reassure states
Early Challenges and Course Corrections
India’s GST launch wasn’t without hurdles:
- Tech glitches, invoice mismatches, and refund delays strained businesses
- Petroleum and alcohol stayed outside GST, creating tax silos
- Frequent rate changes led to confusion, especially for small businesses
However, through Council interventions—like the 2017 rate cuts on 200+ items and the introduction of e-way bills and e-invoicing—GST began to stabilise.
Global Context: How India’s GST Compares
Unlike New Zealand’s flat 15% GST or Singapore’s 9% single rate, India’s multi-slab structure reflects:
- Federal diversity
- Social equity goals
- Political negotiation among states
Globally, most nations operate with 2–3 GST/VAT rates, often with lower rates for essentials and higher rates for luxury and sin goods.
Diwali Reforms: What It Means for You
If the new slabs are approved, consumers can expect direct savings:
- Soaps, shampoos, toothpaste: likely to move from 18% to 5%
- White goods (ACs, refrigerators): could drop from 28% to 18%
- Staples like tea, spices, and medicines: to remain in the 5% bracket
MSMEs may benefit from simplified billing, but may also face temporary liquidity stress during transition.
Unresolved Questions Before the Council Meet
The GST Council, meeting on September 3–4, will deliberate on key issues:
- What qualifies as a “daily-use” item?
- Will anti-profiteering laws be enforced to ensure benefits reach consumers?
- How will states be compensated if revenue falls?
- Will petroleum finally be brought under GST?
Clarity on these questions will determine how smoothly the reforms roll out and how broad-based their impact is.
