GST Recast | Savings or Strain?
India’s Goods and Services Tax (GST) Council has implemented the simplification of GST rates from 22 September 2025, consolidating the existing four rates – 18 per cent, 12 per cent, 5 per cent, 28 per cent – to two rates: 18 per cent and 5 per cent. There is also now a higher rate of 40 per cent on a limited range of “sin’ goods, including tobacco, replacing the existing higher rate of 28 per cent. About 99 per cent of goods under the 12 per cent GST slab have been moved to 5 per cent. This rejig also resulted in 90 per cent of items under the 28 per cent tax slab coming down to the 18 per cent bracket. Since the introduction of the Goods and Services Tax (GST) on July 1, 2017, businesses and individuals have been required to comply with GST registration and tax regulations. However, certain goods and services remained outside the GST framework, falling under the exemption list. This means that suppliers of these goods or services are not required to charge GST from buyers, nor remit any such tax to the government. GST exemptions are periodically revised, and on September 3, 2025, the 56th GST Council expanded this list to include more essentials.
Major constituents of GST 2.0
In addition to the rationalisation of the tax slabs, a major component of GST 2.0 reform is the removal of the GST compensation cess, a levy that has been in place since the introduction of the GST law in 2017. Its purpose was to guarantee state governments a fixed revenue growth rate for five years after the implementation of GST, compensating them for potential revenue losses from the subsuming of various indirect taxes—such as value-added tax (VAT), excise duty, and octroi—into GST. Applicable on luxury goods and sin items like tobacco, pan masala, coal, and high-end cars, this cess was an added tax above the standard GST rate. On Mon, Aug 05, 2024, the Finance Minister announced that, though the GST Compensation Cess technically ended on June 30, 2022, nonetheless with the consent and the collective decision of the GST Council, it had been extended till March 2026 as states had to borrow because the assured GST compensation which had to be paid to the states could not be paid. For example, till 2022-23, the Union government owed West Bengal `2,409.96 crore towards unpaid GST Compensation.
On September 17, 2025, the Central Board of Indirect Taxes and Customs (CBIC) issued Notification No. 02/2025, removing the GST Compensation Cess across 19 major product categories. In the auto sector, cess rates ranging from 1 per cent on small cars to 22 per cent on luxury SUVs are fully scrapped, including a 15 per cent removal on hybrids. Beverages like soft drinks, lemonade, and caffeinated or carbonated fruit drinks will no longer attract the 12 per cent cess. Coal, lignite, and peat lose their `400 per tonne cess, which could reduce energy costs across industries. High-end items like motorcycles above 350cc, yachts, and personal aircraft also see cess removal.
Establishment of the GST Appellate Tribunal (GSTAT) is another major component of GST2.0 reform. Significantly, after eight years of introduction, the government launched the GSTAT on Wednesday, September 24, 2025. While inaugurating the GST Appellate Tribunal, the Union Finance Minister claimed that, henceforth, justice regarding disputes under the GST would be fair, fast, transparent and accessible to all. Enthusiastic comments of both the Prime Minister and the Finance Minister on GST 2.0 reform indicate that GST 1.0 had quite a few serious lacunae, which the government did not address during the last eight years.
Prime Minister Narendra Modi welcomed the “next generation reforms”, while congratulating the citizens on what he called the “GST Savings Festival”. In an address to the nation on September 21, Modi made a strong pitch for promoting ‘swadeshi’ goods and asserted that the next generation GST reforms would accelerate India’s growth story, increase ease of doing business, and attract more investors. ‘GST Bachat Utsav (savings festival)‘ will begin from the first day of Navratri, he said. In the ‘historic’ midnight session at the central hall of the Parliament on July 1, 2017, when the Parliament was lit up for a great event, President Mukherjee and PM Modi stood together and pressed a buzzer to launch GST. Prime Minister Narendra Modi defined GST as ‘Goods and Simple Tax’. Congress and several other Opposition parties boycotted the function. Remarkably, barring AIADMK, all political parties supported the GST Constitution Amendment Bill, which was passed in the Lok Sabha in May 2015.
Revenue loss to the government
It is reported that since 2017, the government has collected over `55 lakh crore as GST revenue. Although the initial estimates show that the net fiscal impact of GST rates rationalisation will be `48,000 crore on an annualised basis, the State Bank of India (SBI) in its latest research report said reforms in Goods & Services Tax (GST) through reduction in rates will cause a minimal revenue loss of `3,700 crore. However, economists fear that the revenue loss would far exceed one lakh crore rupees, as in many items, the final GST payable to the government is less than the GST paid by the producer on raw materials. GST refund claims are likely to exceed the GST paid to the government. In addition to that, the elimination of GST Compensation Cess will substantially reduce revenue collection.
States, which shoulder nearly 60per cent of public expenditure but lack meaningful fiscal autonomy under GST, will absorb much of the strain. Under the new structure, Jharkhand alone projects a revenue loss of about ` 60,000 crore by 2029. West Bengal Chief Minister Mamata Banerjee on Monday (September 22, 2025) said that the revised rate cuts would cost the State exchequer `20,000 crore. According to the Telangana CM, GST reforms will cause Rs 7,000 crore revenue loss to the state. The Maharashtra government estimates an annual drop in revenue by over 7per cent or `10,000 to `12,000 crore. The major losses are expected to be in the automobile and electronic industries, where Maharashtra is a leader both in production and consumption.
Anticipating potential revenue loss, a group of eight states (Himachal Pradesh, Punjab, Karnataka, Jharkhand, Kerala, Tamil Nadu, Telangana, and West Bengal) in August 2025, have sought further compensation while supporting the move to rationalise rates under the indirect tax levy. They have also called for a mechanism to ensure that the GST rate cuts are passed on to end consumers and are not made part of corporate profits.
It is observed that while revenue collection through GST- an indirect tax paid by everyone, has gone up over the years, corporate tax rates have been gradually reduced since 2016. In a written reply in the Rajya Sabha, Minister of State for Finance gave (on July 22, 2025) the estimated revenue forgone due to the tax incentives by way of various deductions in corporate tax, from FY 2019-20 to 2023-24. The corporate tax revenue foregone in 2023-24 stood at `98,999, followed by `88,109 crore and `96,892 crore in 2022-23 and 2021-22, respectively. In 2020-21 and 2019-20, the total corporate tax revenue foregone was `75,218 crore and `8,043 crore, respectively.
An analysis of India’s tax structure reveals that the share of Indirect taxes, which had been falling steadily since the 1980s, has increased from 2010-11 onwards. The combined share of the Union and State indirect tax revenue was less than 60 per cent of the total tax revenue in 2010-11, and the share of the direct tax revenue was more than 40 per cent. In 2021-22, thanks to GST, the share of more regressive indirect tax revenue increased to 65.8 per cent, and the share of the direct tax revenue declined to 34.2 per cent. The increasing share of indirect taxes implies a heavier burden on lower-income individuals.
Compulsion of GST 2.0
At least three major issues have compelled the government to ‘reform’ GST. First, due to its regressive nature and high rates, GST hindered economic growth. Consumption expenditures were low. Coupled with a high rate of unemployment and inflation, signs of ‘gated stagflation’ are distinctly visible. Recent studies reveal that low and middle-income earners had to bear the maximum burden of GST1.0. Unrest among a large section of citizens was brewing as they faced difficulties in meeting their basic minimum needs to sustain a decent life. Second, China is flooding the world, including India, with cheap exports. During the first five months of the tariff war, China earned a record $1.2 trillion trade surplus. So there is a renewed call for ‘swadeshi’ purchase at a reduced price. Third, the steep US tariff has compelled Indian exporters to look for an alternative market. The domestic market is the best option for them at this turbulent time.
Restructured GST rates will most likely benefit the upper and middle-class citizens of the country, as taxes on luxury products have been substantially reduced. Initial reports also indicate higher sales for cars, white goods, and credit card transactions. Removal of GST Cess will further reduce the price of the luxury products.
The sufferings of the poor, who rely on various welfare schemes, are likely to increase due to a fall in revenue collection- both the Union and state governments will curtail their expenditure. The Union Finance Ministry has already issued a notice to stop the purchase of any Diwali gifts. Many of the state governments will find it difficult to continue with their welfare schemes targeted at the disadvantaged citizens, due to a lack of funds.
While increased private expenditure of the upper and middle class consumers will boost the demand, decreased government expenditure will reduce it. To understand how these two opposite forces impact the effective market demand, we will have to wait for a few more weeks.
