The announcement made late on Wednesday night on the GST which was foretold by PM Narendra Modi in his Independence Day address last month, is a rate slash shaped as much by global trade pressures - Donald Trump’s fresh tariffs on Indian exports - as by domestic politics.
GST Council Clears Two-Tier Tax Structure
Chaired by Finance Minister Nirmala Sitharaman, the GST Council agreed to the previously proposed two tier tax – 5 and 18 per cent – with a zero tax slab for essentials and ‘Sin tax’ rate for alcohol, tobacco and luxury goods, leaving the vexatious issue of tax shortfalls for states hanging in the air.
The announcement offered relief on food, medicines and household items while raising levies on tobacco, sweetened drinks, luxury motorcycles, yachts and personal aircraft.
The measure, if successful, could ease life for ordinary families and bring GST closer to the global norm of progressive consumption taxes.
It could also help sway crucial elections to state assemblies from Bihar to be held later this year to West Bengal, expected to be fought over next year.
Politics in GST Reform
However, behind the headlines lies a more complicated story: a reform that is as much about political survival and international signalling as it is about domestic economics.
US President Trump’s 50 per cent tariff will prove to be a killer for Indian industry used as it is to easy access to the vast American market.
The only way out if India wants to continue to be a major player in the global marketplace is to reduce costs for India Inc., to help it compete in markets elsewhere against rivals like China, Vietnam and Brazil.
Even if it doesn’t turn India into another China, the GST cuts will help slash input costs, finance charges for the aspiring Ambanis and Adani’s of this country.
Tax Cuts Target India’s Middle Class
The cuts in taxes for goods ranging from shampoos to cancer drugs to insurance to small cars will also be GST in service of the “aspirational middle class,” a group that successive Indian governments court as both consumer base and political constituency.
Yet the fiscal arithmetic is not so tidy. The immediate revenue impact could be extremely steep.
State governments, already bracing for the expiry of Union government compensation transfers in December, face the prospect of tighter budgets for health and education. Meanwhile, the administrative burden is formidable. Roughly 1,500 goods and services must be reclassified, billing systems updated, software reprogrammed, and staff retrained.
For smaller firms, these costs are not trivial.
There is also the fear that unless the government compels businesses to pass savings on to consumers, the relief may vanish into corporate margins. The market impact is already being felt. Announcing deep rate cuts two months in advance has distorted distribution channels, with wholesalers delaying purchases in anticipation of lower rates. Consumer goods companies warn of inventory pile-ups. International precedents, such as Malaysia’s ill-fated GST experiment, suggest that managing consumer expectations and ensuring enforcement will be critical. If cheaper rates do not translate swiftly into lower retail prices, the political dividend could evaporate. For many businesses, the disruption of reclassification and repricing could outweigh the promise of long-term relief. Still, few doubt the need for simplification. Since 2017, India’s GST—with its multiple slabs, exemptions and anomalies—has bred litigation and distorted supply chains.
Streamlining rates could restore credibility to a reform once hailed as a “one nation, one tax” breakthrough but soon bogged down in complexity.
The stakes are high. Trump’s tariffs have narrowed India’s external trade space, and New Delhi wants GST to double as both a shield for households and a battle axe with which to win new markets abroad. Success would allow India to claim that it has made its tax regime globally comparable, progressive and citizen-friendly. Failure could mean fiscal slippage, strained centre–state relations, and political blowback in a crucial election cycle. What is being pitched as a festive bonanza may yet be remembered as another midnight reform whose lofty promise faltered in execution.
