These changes certainly bring India’s GST a lot closer to what an ideal GST would look like, points out Karan Bhasin.

Illustration: Dominic Xavier/Rediff

During the global financial crisis, there were concerns regarding the global growth story.

China emerged as an anointed knight to provide the much needed support to an otherwise fragile economic environment.

Almost two decades on, a similar story is being scripted by its neighbour, which registered an impressive GDP growth rate of 7.8 per cent in Q1FY26.

India’s economic momentum is supported by a series of reforms that were initiated from the early 2010s.

One such important reform was the Goods and Services Tax or the GST, which replaced the erstwhile complicated indirect taxation structure of excise and value added taxes.

The GST by its design was a destination-based tax, making it self-enforcing and addressing concerns of tax cascading.

The GST has done remarkably well for India’s fiscal federalism as both the Union government and states have witnessed a steady stream of revenues.

The strength of the system is reflected in the fact that it survived one of the largest fiscal shocks in the form of pandemic.

However, despite the benefits of GST, there was scope for improvement. In the summer of 2020, in a joint paper with Arvind Virmani, we looked at the structure of GST.

Issues such as multiple rates, significant end-use exemptions and multiple rates for the same category of goods added to the overall complexity of the system.

Some of this complexity was introduced due to political economy considerations and perhaps will remain as a reality for the foreseeable future.

An important element of agile policymaking is recognising an economic crisis as the perfect opportunity to undertake reforms.

It is not surprising that there was a renewed push for GST reforms, given economic uncertainty and growth headwinds from external sources.

The structure of the GST council makes drastic changes in the taxation structure difficult, especially when the objective is to deliver the same in a time-bound manner.

The Government of India delivered precisely this on September 3, 2O25.

Incidentally, six years ago in September 2019, Finance Minister Nirmala Sitharaman delivered a large corporate tax cut that has since then helped restore corporate balance sheets.

So, what is the recent GST cut, and is it sizeable enough to make a difference?

Based on consumption expenditures, the median consumer is expected to experience a tax cut of 5.4 per cent.

This reflects a sharp reduction in India’s indirect taxation regime even as it introduces a higher tax slab of 40 per cent.

Do note that even as the ‘sin-goods’ slab is added, compensation cess has been merged with the GST.

For the top 10 per cent of consumers, the new GST rates reflect a 4.8 per cent tax cut.

The steepest cuts were for everyday consumption items with perhaps a clear objective of maximising the tax cuts for India’s middle and lower-middle class households.

Goes without saying that this leaves greater disposable income with consumers before the festival season and would provide some support to domestic consumption.

It would be premature to estimate the effect of this tax cut on overall growth, but these changes certainly bring India’s GST a lot closer to what an ideal GST would look like.

Here’s hoping that positive effects of these changes would encourage constituents of the GST Council to undertake further simplification.

Eventually, a two-rate regime with minimal exemptions is the ultimate destination, even though it will take a decade or more to get there.

In addition to tax cuts, there have been a series of procedural reforms aimed with the objective of easing compliance burdens for small and medium enterprises.

Compliance costs for these companies are much higher as a proportion of their overall revenues due to smaller size.

Cutting them would create more room for these firms to invest in their businesses.

On a final note, a contrasting picture emerges as I look across the world. India, on one hand is reducing taxes — on income, on profits and now on consumption.

On the other hand, several governments are experiencing strenuous public finances and seeking either bailouts or implementing austere policies.

The contrast is perhaps a reflection of the precarious public finances in wake of large stimulus packages during COVID-19 and a longer-term stagnation of economic activity.

India, in contrast, followed strict fiscal discipline through much of the last decade and therefore has some room to rationalise its taxes.

Karan Bhasin is a New York-based economist. Views are personal

Feature Presentation: Aslam Hunani/Rediff