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The Goods and Services Tax (GST) Council has introduced major reforms in the tax structure—changes many experts believe were long overdue. Since its rollout in 2017, India’s GST regime has faced criticism for being complex and inconsistent with global best practices. Ideally, GST should have one or two uniform rates. Instead, India began with five or six slabs (and effectively more, after exemptions), undermining efficiency and creating compliance difficulties.

Frequent tinkering with rules added to the confusion: GST has been amended nearly 590 times. Rule 89 alone was amended 33 times, Rule 96 twenty-nine times, Rule 43 twenty-three times, and Rule 142 eighteen times.

In its September 3 meeting, the Council streamlined the system to two main slabs—5% and 18%—while introducing a 40% “special rate” on sin and luxury goods such as tobacco, SUVs, yachts, and helicopters. The revised rates took effect from September 22.

Finance Minister Nirmala Sitharaman described the reform as “pro-people,” highlighting relief for labour-intensive industries, farmers, agriculture, and healthcare. Prime Minister Narendra Modi called it “GST 2.0—a double dose of support and growth for the nation.”

Mixed sectoral responses

The auto and pharmaceutical industries expect rate cuts to spur demand. Airlines, however, oppose higher rates on premium passengers. Small entrepreneurs worry about rising labour costs, while the textile sector has expressed concern over the 18% rate on garments priced above ₹2,500.

According to SBI Research (The Hindu, September 7), 413 of the 453 items reviewed—over 91%—saw rate cuts, mainly shifting from 12% to 5%. Forty items faced hikes, including 17 luxury goods that moved from 28% to the new 40% slab. In some cases, when compensation cess is added, the effective incidence may not actually decline. For example, luxury cars and SUVs previously taxed at 45–50% will now fall under the 40% slab.

Fiscal implications: Union vs States

The Union Finance Ministry estimates a revenue sacrifice of around ₹48,000 crore. Economists like Arvind Subramanian believe the actual loss could be higher once cess collections are accounted for.

Several states are concerned about shrinking revenues: West Bengal estimates a ₹10,000 crore loss, Kerala ₹8,000–10,000 crore, and Karnataka ₹15,000–20,000 crore. Eleven states reportedly raised concerns in the Council meeting, demanding compensation and a higher share of GST proceeds—possibly 50–60% instead of the current 41%. Economists, however, argue that the new 40% slab (absorbing earlier cess) could cushion states against losses.

Will GST 2.0 sustain growth?

Chief Economic Advisor N. Anantha Nageswaran has argued that the reforms will have a lasting positive impact by lowering production costs, reducing prices, and triggering higher consumption. But dissenting voices caution otherwise.

Economists Abhishek Anand, Josh Felman, and Arvind Subramanian (Economic Times, September 8) note that while fewer slabs simplify taxation, the actual effect on prices depends on how businesses pass on the benefits. In a $4 trillion economy, the overall impact may be marginal.

Other concerns include persisting complexities—value-based, end-use-based, and input-based GST variations—and the removal of input tax credit (ITC) for healthcare and insurance, which could revive cascading taxes.

Critics also point out that India’s high cost of doing business—stemming from policy instability, weak transparency, and legal uncertainty—could blunt long-term gains.

Public finance expert Arun Kumar warns that cheaper products from the organized sector may undercut the unorganized economy, which employs millions in micro and small enterprises. This could depress incomes for crores of households, potentially dragging growth down instead of lifting it. Former finance ministers P. Chidambaram and Yashwant Sinha have voiced similar concerns.