Keep 2, Eliminate 2. Rationale Behind Proposed New GST Rates Explained

Rationalisation of the Goods and Services Tax framework - a process that began this morning with Finance Minister Nirmala Sitharaman chairing a GST Council meet - is based on sharp differences in revenue collected under each of the existing four slabs, sources told NDTV.

Sources said tax collected from the 18 per cent slab over the past eight years accounted for over two-thirds of the total GST revenue, i.e., about 67 per cent, in that time. Conversely, the 12 per cent slab generated the lowest, an estimated five per cent of the inflow in the same period.

The five and 28 per cent slabs yielded seven and 11 per cent, respectively.

Based on this data, the Group of Ministers' recommendation was to eliminate two slabs - the 12 per cent because the revenue yield is insignificant, and the 28 per cent because it should prompt manufacturers to cut prices of luxury goods. It has been argued the high GST on these - seen as 'aspirational' items by India's large middle class - actually discourages consumption.

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Dropping them to the mid-level 18 per cent category should offer considerable savings to (in)famously price-sensitive Indian consumers, and increased unit sales should offset any concerns, such as reduced profit margins, that high-end goods manufacturers may have.

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As a result, such manufacturers, who generally operate in labour-intensive sectors like automobiles and consumer electronics, may be prompted to hire more workers.

It has also been argued many goods in the 28 per cent slab are not 'luxury' items; examples include cement and paint, key raw materials for an under-pressure housing sector.

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Eliminating these two slabs will leave the five and the 18 per cent categories that contribute a combined 74 per cent of revenue from GST, which totalled Rs 11.37 lakh crore in 2020/21.

In 2024/25, gross collections were a record Rs 22.08 lakh crore, a YoY growth of 9.4 per cent.

Data released Sunday (for August 2025) showed gross revenue was Rs 1.86 lakh crore, up from was Rs 1.75 lakh crore a year ago, an increase of 6.5 per cent.

Sources also said a rationalisation is taking place now because the government has eight years of data and wants to use that to make the system easier to understand and more efficient.

The GST Council meet, scheduled for today and tomorrow, will now attempt to build consensus for this rationalisation. There is, however, likely to be opposition from non-BJP ruled states.

Tamil Nadu and West Bengal - both of which vote next year - are among eight expected to red-flag potential revenue loss (likely around Rs 50,000 crore and likely, it is hoped, to be offset by increased consumption) and ask for compensation. They are expected to propose hiking tax on 'sin' goods.

Meanwhile, earlier today Ms Sitharaman said on X these proposed reforms - which Prime Minister Narendra Modi hailed as an ' early Diwali gift' during his Independence Day speech - will "reduce the compliance burden on small businesses and allow them to flourish..."

Hon'ble Prime Minister Shri @narendramodi has also recently announced the creation of a ‘Task Force for Next-Generation Reforms', with a clear mandate to simplify regulations, lower compliance costs, and build a more enabling ecosystem for start-ups, MSMEs and entrepreneurs.… pic.twitter.com/xHHWpZTmPB

— Nirmala Sitharaman Office (@nsitharamanoffc) September 2, 2025

Simplified rules, fewer tax slabs (and, consequently, less paperwork) will "create a more enabling ecosystem for start-ups, MSMEs and solo entrepreneurs", the Finance Minister said.

GST rationalisation at this time is also important because India is navigating global economic and geopolitical challenges, including supply chain disruptions due to wars in Ukraine and West Asia and, significantly, the 50 per cent tariff announced by US President Donald Trump.

Sources said the government hopes a GST revamp - which will make goods, particularly those seen as 'daily use' items, cheaper - will improve demand and strengthen the economy.

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US-bound goods that may, for now, be more expensive there than global competitors, could find stronger domestic demand, even if they fail to find alternate export markets, sources said.

In fact, a recent SBI Research report suggested GST reforms, combined with recent income tax cuts, could lift consumption by Rs 5.31 lakh crore, equal to around 1.6 per cent of GDP.

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