The GST Council meeting, chaired by Union Finance Minister Nirmala Sitharaman, is underway. All eyes are on how the present rates will be rationalised and how the committee plans to offset the deficit in tax revenue.
The GST Council meeting started on September 3 and will conclude on September 4. Expectations are high that the council will announce tax cuts that will affect hundreds of products, from shampoos and toothpaste to hybrid cars.
When Prime Minister Narendra Modi announced next-generation GST reforms in his Independence Day speech on August 15, his intent must have been not only to reduce the tax burden on consumers but also to reinvigorate the consumption cycle, which has remained dull despite healthy monsoons and income tax relief.
GST rationalisation: Key expectations
At present, there are multiple slabs of 5 per cent, 12 per cent, 18 per cent, and 28 per cent of GST rates. Experts point out that the Centre wants to replace them with a two-slab structure of 5 per cent and 18 per cent, and a 40 per cent special rate for sin goods.
As concerns over US tariffs mount, the government is aiming to trigger a consumption-led recovery by moving nearly 50 products, including condensed milk, cheese, dried fruits, and preserved fish and vegetables, from the 12 per cent slab to the 5 per cent GST slab. Moreover, about 25 items, including chocolates, ice cream, cakes, and corn flakes, could be shifted from the 18 per cent slab to 5 per cent.
This could be the biggest reform of the GST system since its introduction in India on July 1, 2017.
What GST rate rationalisation means for the Indian economy
In simple words, lower GST rates on FMCG, automobiles, consumer durables and electronics, and insurance premiums will mean more disposable income in the hands of consumers, which in turn may lead to higher consumption, increased economic activity, and overall growth.
“GST 2.0 represents one of the most pro-consumption policy moves in recent years. By reducing prices in everyday categories and big-ticket durables alike, the reform could accelerate demand just as rural incomes and inflation trends are turning favourable,” said Sonam Srivastava, Investment Manager on smallcase and Founder at Wright Research.
According to JM Financial, while this would be a significant boost to demand over the medium term, in the short term, it could lead to consumers holding off on purchases until the proposed GST cuts lead to lower prices.
Manoranjan Sharma, Chief Economist at Infomeric Valuation and Ratings, believes GST rationalisation could spur consumption and stimulate economic growth, potentially boosting consumption by approximately ₹1.98 lakh crore through higher household disposable income.
“A stronger domestic market, less dependent on external trade, would also reduce India’s vulnerability to global economic shocks, thereby enhancing its overall economic resilience,” said Sharma.
GST rationalisation: Potential challenges
However, reducing GST rates is not going to be easy for the council because GST contribute a heavy share of states’ revenue. In case of cuts, they may face significant financial strain, which might affect their ability to make capital expenditures on social programs and infrastructure projects.
“States heavily reliant on GST revenue could face significant financial strain, which might hinder their ability to fund critical social programs and infrastructure projects, necessitating compensation mechanisms, viz., phased revenue sharing or transitional loans, to help fiscally weaker states manage the shift and maintain stability,” Sharma observed.
Moreover, Sharma pointed out that the positive effects of GST rate reductions on consumption and profitability have a lagged effect, creating a potential short-term gap, as tariff shocks impact immediately.
“Bridging this gap requires coupling GST reform with temporary direct fiscal relief for exporters and MSMEs (micro, small, and medium enterprises), providing them with immediate support while the market adjusts,” said Sharma.
G. Chokkalingam, founder and head of research at Equinomics Research Private Limited, underscored that there are pressures from state governments as well as from the Centre’s own fiscal balance, on account of the last budget’s direct tax concessions and the government’s obligations to provide fiscal support to exporters. Hence, there is limited scope for GST reforms.
Sharma said GST reforms must be complemented by a multi-faceted approach, including targeted relief schemes, export diversification through new Free Trade Agreements (FTAs) and market access, negotiations for tariff reductions, and financial measures to stabilise state finances.
“By integrating domestic tax relief with international trade strategies and industrial policy, India can effectively steer its economic trajectory toward greater self-reliance, resilience, and global competitiveness,” said Sharma.
Chokkalingam expects a boost to consumption on account of the proposed reforms.
“A successful monsoon, along with direct tax concessions given in the last budget, would provide a complementary boost along with GST reforms. Since there are some fiscal pressures, we expect an aggressive sin tax to meet the shortfalls in fiscal resources to support this reform,” said Chokkalingam.
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