The GST Council’s latest decisions have been heralded as the most consequential overhaul of India’s indirect tax regime since the system’s introduction. The consolidation of slabs and rationalisation of rates is no small achievement.
It offers the promise of tempering inflation, buoying sagging consumer sentiment, and adding a modest but welcome push to economic growth. Importantly, it does so without derailing the government’s carefully guarded path of fiscal consolidation. At roughly Rs 48,000 crore, the cost of this “Diwali gift” is a fiscal outlay that remains eminently manageable.
Timing, however, is as crucial as substance. The so-called “Trump tantrum” of escalating tariffs from the United States has already begun to ripple through the global economy. India, like other open economies, cannot escape these headwinds. By rationalising the GST, policymakers have sought to strengthen the domestic demand engine and create a buffer against external turbulence.
But if history is any guide, crises have always been India’s reform catalysts—the balance of payments collapse of 1991, the global financial crisis of 2008, the pandemic of 2020. The tariff surge from Washington should be treated in that same category: a moment to move decisively, not incrementally.
The central lesson is straightforward. What cannot be controlled abroad must be counterbalanced at home. If Indian exports are to face higher barriers, the domestic economy must be freed of its own self-imposed obstacles. That requires a restructuring of the tax architecture. Inverted duty structures must be eliminated in full, not partially corrected. Refunds should be automatic and time-bound to relieve businesses of the liquidity pressures that continue to hobble them.
The council deserves credit for urgency. Concluding these decisions in one day signals an awareness that policy must now keep pace with markets. Packaged as a festive bonanza and framed as consensus politics, GST 2.0 also serves the government’s message of delivering relief while keeping fiscal discipline intact. After all, in an electoral democracy, any reform is as much about perception as policy—and the willingness of states to align reflects, at least for now, a functioning model of cooperative federalism.
The reduction of slabs will inevitably reduce classification disputes that had, over time, become near-permanent fixtures of litigation and compliance. But candour is necessary: GST 2.0 still stops short of what was possible.
A braver reform would have gone further still. India could well have collapsed the rate structure into just two slabs—a 5 per cent levy on all goods to spur consumption and simplicity, and a 50 per cent tax on sin and luxury products. Consumption would likely have risen faster under such a transparent regime, while the persistent confusion of multiple slabs would have vanished.
Evidence across years and sectors shows that high duties on alcohol, tobacco and luxury consumption do little to suppress demand. They simply transfer more of the fiscal weight to those most able to carry it. Such a restructuring would have been the cleanest way to combine efficiency with equity, shielding the poor and middle class while ensuring that the affluent and the indulgent bore a fairer share. Instead, GST 2.0 has left us with an untidy halfway house—some simplification, yes, but not the kind of clarity or boldness that could have truly reset India’s tax architecture.
Most importantly, sectors such as petroleum and alcohol cannot remain politically untouchable forever. A GST that excludes five per cent of the GDP and nearly 40% of state revenues is structurally incomplete. Estimates show that their inclusion could expand the tax base from Rs 140 trillion to Rs 157 trillion and lift collections from Rs 25 trillion to Rs 40 trillion. Yet, political economy inertia continues to block this game-changer path.
The deeper challenge is one of fairness. Recent household consumption survey data reveal a troubling symmetry: in rural India, the poorest 50% bear 30% of the GST burden, virtually identical to the middle 30%, while the richest fifth shoulder barely 37% to 41%. Urban India shows the same pattern.
In effect, the wealthiest contribute only marginally more. It is also why the buoyancy of the GST collections, celebrated as a fiscal virtue and economic activity indicator, is socially harder to defend. A narrow direct-tax base—with only six to seven per cent of Indians paying income tax—has left the exchequer over-reliant on indirect taxes. In such a framework, the middle and lower classes, sadly, are the permanent shock absorbers of state finances.
None of this is to deny progress. GST 2.0 will reduce inflationary pressures, smooth business cash flows, and restore a measure of predictability to the tax system.
But India must resist the temptation of declaring victory too early. Leakages and fraud remain a real risk and demand resolute enforcement. Simplification must move beyond tokenism towards a genuine overhaul, especially to stop harassment at local levels by tax authorities.
GST 2.0 represents a step towards simplicity, not yet towards equity. The council has the more exacting task of redrawing the fiscal social contract. Eventually, we need to confront the inequity of financing a modern state largely through regressive indirect taxes, while leaving direct taxation shallow and underdeveloped. That task will demand not just consensus, but courage.
Dr Srinath Sridharan is a policy researcher and corporate adviser. X: @ssmumbai
