Beyond the slabs: Why the new GST regime is a game-changer

The latest GST announcements, shared by Prime Minister Narendra Modi on Independence Day, are not just another set of tax adjustments; they represent a fundamental, strategic shift in our economic governance. This is a moment of profound change, one that aligns with the vision of a simplified, transparent, and growth-oriented India. These reforms, which will likely be enacted before Diwali, promise to be a true “Diwali gift” to the nation, as the Prime Minister aptly put it.

A bold move towards simplicity

The most impactful change is the proposed move from a four-slab GST structure to a simpler two-slab system. The original four slabs (5%, 12%, 18%, and 28%) were a necessary compromise when GST was first introduced, balancing the need for a unified tax with the diverse revenue requirements of our states. However, the multi-slab system also created complexities, leading to classification disputes and administrative burdens. By proposing to consolidate most items into a 5% “merit” rate for essentials and an 18% “standard” rate for most other goods and services, the government is signalling its commitment to a simpler, more predictable tax regime. This move will not only reduce the compliance load for businesses but also make it easier for consumers to understand the tax they are paying. It’s a bold step that moves us closer to a “Good and Simple Tax” as the original vision for GST was often described.

Empowering the Indian consumer

One of the most exciting outcomes of these proposed reforms is the potential for a significant reduction in the prices of a wide range of goods. Imagine consumer durables like air conditioners, televisions, and refrigerators becoming cheaper overnight as they move from the punitive 28% slab to the more reasonable 18% bracket. This is a direct measure to boost consumption and improve the “ease of living” for millions of middle-class Indian households. Similarly, the proposed reduction in GST on health and term insurance will make these crucial products more accessible, encouraging greater financial security and a healthier population. This is a win-win: consumers benefit from lower prices, and businesses stand to gain from increased sales and a stimulated economy.

A catalyst for Make in India

From a trade and industry perspective, the reforms are perfectly aligned with our long-standing goal of fostering domestic manufacturing and self-reliance. The proposal to correct the inverted duty structure is particularly crucial. For years, many of our industries have been burdened by a system where the tax on raw materials was higher than the tax on the final product, creating working capital issues and stifling growth. By fixing this, the government is levelling the playing field for our manufacturers, allowing them to compete more effectively both domestically and on the global stage. This will encourage greater value addition within India, create more jobs, and strengthen our position as a global manufacturing hub. The end of the compensation cess also provides states with greater fiscal flexibility to manage their finances, enabling a more sustainable and predictable tax environment for the long term. This is a critical step in building the Aatmanirbhar Bharat we all aspire to create.

The elusive US deal

One of the less-discussed but potentially most significant outcomes of these reforms is their impact on the stalled India-US trade deal negotiations. For years, the US has expressed concerns over the complexity and unpredictability of India’s tax and regulatory framework, including the frequent changes to GST slabs and the ambiguity in tax classifications. This has been a major sticking point in trade discussions. By moving to a simplified, two-slab structure and addressing the inverted duty issue, India is sending a strong signal of commitment to a transparent and stable tax environment. This could assuage American concerns, as a predictable indirect tax regime reduces the risk and uncertainty for US businesses looking to invest in or trade with India. While a direct link to the ongoing negotiations remains to be seen, this reform package removes a key structural impediment and could provide the momentum needed to accelerate a deal that benefits both nations.

The road ahead

While the proposed changes are highly promising, their successful implementation will depend on a few key factors. The GST Council, a body I know well, will need to build consensus among all states. The final decisions on which items move to which slabs will be critical and must be handled with careful consideration of the revenue implications for states. However, the strong economic performance and record GST collections we’ve seen recently provide a solid foundation, giving the government the confidence to pursue these ambitious reforms. Technology will continue to play a pivotal role, with measures like pre-filled tax returns and faster, automated refund processes making compliance even smoother.

These are not just technical amendments; they are a clear indication of a mature tax system that is now confident enough to simplify and streamline. This is the next logical step in our GST journey, and it’s one that will unlock significant economic potential, benefiting everyone from the small business owner to the everyday consumer. The path to a truly simplified and efficient tax system is rarely smooth, but with these reforms, we’re taking a decisive stride in the right direction.

Dr Badri is Founder, Infisum and Non Resident Fellow, NITI Aayog