Gross Goods and Services Tax mop-up was ₹1.73 lakh crore in September 2024. Last month, the collection was ₹1.86 lakh crore, as per government data released. File.
| Photo Credit: Reuters

Finance Minister Nirmala Sitharaman. File.
| Photo Credit: Bijoy Ghosh

The story so far: On September 3, the GST Council authorised a new paradigm in the indirect tax regime. There will be fewer rates, and the Goods and Services Tax (GST) on most items have been reduced. While this has been welcomed by most sectors, there are some which are somewhat disgruntled. There are also concerns over the revenue implications.

Also read | GST Revamp: Who benefits? Full item-wise roundup

What prompted these changes?

The rationalisation of the multiple rates in GST has been on the anvil for a long time. The Council had in September 2021 constituted a Group of Ministers (GoM) to look into rate rationalisation. This GoM began its work, but seemingly little progress was made. The GoM was composed entirely of representatives from the States, with no representative from the Centre. So, in order to nudge it in the direction it wanted, the Union government had to make a proposal to the GoM. The Ministry of Finance on August 15, 2025, announced that it had submitted its proposal to the GoM. Earlier that same day, in his Independence Day speech, Prime Minister Narendra Modi had announced that these “next-generation” GST reforms would be a Deepavali gift to the nation.

By August 21, 2025, the GoM — following a briefing by Union Finance Minister Nirmala Sitharaman — had accepted the proposals and forwarded them to the GST Council. The Council then deliberated on these proposals on September 3 during a 10.5-hour-long meeting, following which it announced its decisions.

What are the changes?

The existing GST structure has multiple rates, even when considering only the main ones. The main rates comprise 0%, 5%, 12%, 18%, 28%, and a compensation cess over and above the 28% slab. This has been reduced to main slabs of 0%, 5%, 18% and 40%. The compensation cess for most items has been removed. It is still levied on tobacco products, but even that will be removed by the end of this calendar year, when the Centre pays back the loan it took to compensate States during the COVID-19 pandemic.

Apart from this, many items have been moved to lower tax slabs. According to an analysis by the State Bank of India’s economics research wing, of the 453 items that saw a change in their GST rate, 413 (or a little more than 91%) saw rates being cut, while 40 items saw rates increasing. The bulk of the rate reductions — 257 items, mostly common use products — were from the 12% to the 5% slab. Out of the 40 items that saw their rates increase, 17 were moved from the 28% slab to 40%. Here, it is important to note that the actual tax incidence might not have increased. For example, once the compensation cess is added, the effective tax rate on luxury cars and SUVs is 45-50%. That will go down to 40%.

Why were they necessary?

There are several reasons why the GST rate cuts make sense now. The first is that the legal period for the GST compensation cess will likely be coming to an end this calendar year. It can be levied up to March 31, 2026 or till when the Centre pays off its loans, whichever is earlier. Ms. Sitharaman said she expects the loans to be repaid this calendar year. The removal of this cess, without raising the base rates on tobacco products, would mean that these ‘sin’ goods would have suddenly become significantly cheaper. This is something the Union government could not be seen to be condoning. That set a time limit by when the new rates had to be implemented. The other reason is that the government expects some sort of detrimental impact from the 50% tariff imposed by the U.S. on imports from India. This is clear from the fact that, despite a strong 7.8% GDP growth in Q1 of this financial year, the government has not changed its 6.3%-6.8% growth estimate for the full year, implying it expects growth in the subsequent quarters to be significantly slower. The boost from the GST rate cuts is expected to offset this hit. The government, however, has officially denied any such connection, saying the GST changes were part of an overall reforms push and not related to the tariffs.

Which sectors were happy with the reforms?

The healthcare industry voiced its approval of the changes, saying the decision to reduce GST in the sector from 12% to 5% on a wide range of medical products would directly benefit patients. The renewable energy sector, too, praised the decision to reduce taxes on renewable energy components from 12% to 5%, saying this was a progressive step towards accelerating India’s clean energy transition. Consumer appliance makers were also upbeat about the cuts, saying it would boost demand, especially in the run-up to the festive season.

The real estate sector said that bringing down the GST rate on cement from 28% to 18%, and on other building materials such as granite slabs, would reduce costs for the sector and be a big boost. Auto manufacturers said the reduction of GST on cars and non-luxury bikes from 28% to 18% would spur demand.

Which sectors voiced reservations?

The textile industry welcomed the downward revision of GST rates for both man-made fibre and cotton sectors to 5%, but also voiced its disappointment over the 18% duty for garments priced above ₹2,500 each. They said that woollens, wedding apparel, and traditional Indian wear would become more expensive.

While auto manufacturers welcomed the rate rationalisation, dealers voiced some worries about consumers postponing their purchases until September 22, when the new rates come into force. They also called for greater clarity on what happens to the cess on vehicles they have bought from manufacturers but not yet sold.

The insurance sector will likely also see a mixed picture from the GST rate cuts. The exemption of personal life and health insurance from GST will increase insurance penetration, but the simultaneous removal of input tax credits might increase costs for insurers, thereby eating into their profits.

Editorial | Cuts in time: On the new GST system  

Airlines have collectively slammed the higher GST on non-economy seats, while vegetable oil producers said the Council could have resolved the inverted duty structure on edible oils — something it did for fertilizers and man-made textiles. The increase in the GST rate for labour charges from 12% to 18% has also led to some resistance from representatives of the MSME sector, who said their costs would increase.

What is the revenue impact?

The Centre said the revenue implication would be ₹48,000 crore based on consumption patterns in 2023-24. However, the real impact will be ascertained only when new data is obtained. The SBI research team estimates it to be a much smaller ₹3,700 crore. Opposition States, however, are worried. They have voiced their demand for a cess to be levied on items in the 40% slab, the proceeds of which can be used to compensate States for the revenue hit. This was not accepted by the Council. The States will have to look for their own sources, and the 16th Finance Commission, to make up any losses.

Published – September 07, 2025 02:23 am IST