Sushma Ramachandran

Reform of the eight-year-old Goods and Services Tax (GST) is finally on the cards. The Group of Ministers on Rate Rationalisation set up by the GST Council has decided to accept the proposals for reviewing the tax structure. It is now for the GST Council itself, which has representation of all states, to take a view on the reforms.

It may be difficult for the council to oppose the proposals, which will lead to a fall in consumer prices, but states are likely to seek compensation for any revenue loss.

The GST was originally modelled on similar levies introduced in other countries that had been successful in simplifying and rationalising the indirect tax system. It was expected to provide a stimulus to economic growth, as this has been the outcome wherever it was implemented. Yet the existing GST is considerably different from the original concept.

It was supposed to be a single-point tax that would replace the numerous central and state cesses that had made taxation such an onerous business in this country. However, states had serious concerns over the prospect of the new levy leading to reduced revenue inflows. They were zealous in seeking to protect resources garnered through their state level taxes.

As a result, the GST became multilayered with differing avatars for inter-state and intra-state goods along with four separate tax slabs. It may have been vastly better than the earlier system of innumerable central and state levies, but it was a far cry from the initial single tax concept.

Over the years, the GST Council comprising representatives of all states has made many changes, seeking to ease these complexities. Yet it has remained bogged down by the original bulky structure. This includes the four types of GST - integrated GST, imposed on inter-state supplies of goods and services, as well as central, state and union territory GST, imposed on intra-state supplies. In addition, there are four tax slabs currently - five, 12, 18 and 28 percent.

The reforms now proposed, described as a Diwali gift to the nation by Prime Minister Narendra Modi on Independence Day, will be to compress the four slabs into two, retaining the five and 18 percent rates. In addition, there will be a small list of luxury or supposedly “sin” goods to be taxed at 40 percent.

𝐀 𝐝𝐨𝐮𝐛𝐥𝐞 𝐃𝐢𝐰𝐚𝐥𝐢 𝐟𝐨𝐫 𝐈𝐧𝐝𝐢𝐚𝐧𝐬! 🎇

Save more this Diwali as PM Modi’s big GST gift makes taxes simpler and lighter on your pocket..🎉 pic.twitter.com/3HCbDQ6kjP

— BJP (@BJP4India) August 16, 2025

This will simplify the system to a large extent and end complications of taxing some sectors like automobiles. The present cumbersome system of a 28 percent slab along with compensation cess of one to 22 percent will be done away with and automobiles will come under a single slab.

In fact, it has been the puzzling intricacies of rates in the GST structure that have made life difficult for trade and industry. Instead of easing the process of doing business, the tax evolved into one with endless possibilities for the bureaucracy to tie industries into knots with red tape. The famous popcorn case sparked a million memes and even merited a comment in the Wall Street Journal. Popcorn was taxed differently with caramel or when packaged. One businessman even earned the ire of Finance Minister Nirmala Sitharaman for describing the frustration of deciphering the differing tax rates on the humble cream bun.

To add to the complexity is a compensation cess meant to give a cushion to states for their perceived loss of revenues. Under the new system, this cess is proposed to be eliminated by next year.

The reform and simplification of GST will thus come as a huge relief to trade and industry especially small and medium businesses. What has to be seen, however, is whether the implementation of this system will also be streamlined to avoid hardship to users. The drive to prevent frauds has led to widespread complaints over unnecessary harassment.

The aim is now to have technology-driven registration for small businesses and start ups along with automated processing of refunds. Actually carrying out this plan is critical if the ultimate objective of improving ease of doing business is to be met.

As far as the common man is concerned, GST reform should translate into lower prices for a wide range of essential goods as well as consumer durables and electronics. Indirect taxes are a levy on the entire nation, unlike direct taxes which are only collected from a small percentage of the population. It is thus in the fitness of things that GST rates should not only be simplified but reduced especially in the category of mass consumption goods.

Yet the present overhaul of the system is silent on one key area, and that is the exclusion of petroleum products and alcohol from the ambit of GST. The reason these areas were kept out initially was states’ worries over loss of revenues. In some states, petroleum products and alcohol account for 14 to 17 percent of revenue collections. This needs to be brought into the GST fold, however, as this disrupts the system of input tax credit (ITC). The ITC lets enterprises reduce tax liability by claiming credits on GST paid for business -related purchases. This is not available on either petroleum products or alcohol right now.

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Since the government is describing this as next generation reforms in GST, it needs to take the final step of bringing these two critical goods into the system. It can be done in a phased way by bringing products like diesel and petrol into the ambit of GST initially and then moving on to alcohol. The fear of revenue loss should have abated by now as GST collections have risen consistently over the past eight years. The pattern is likely to be repeated in the case of petroleum products and alcohol. In any case, it is time for the centre and states to overhaul the GST system completely rather than stop at a partial reform.

The author is a senior journalist who writes on financial issues and international relaitons