Basics
- GST Council: Apex federal body chaired by Union Finance Minister with state finance ministers as members.
- Meeting: 56th meeting held in September 2025.
- Objective of reforms: Rate rationalisation → simplify GST structure, boost compliance, support common man, and ensure buoyancy.
- Proposed structure:
- 5% (essential/common goods & services)
- 18% (standard rate for majority of goods & services)
- 40% “special rate” (sin goods & luxury items like tobacco, big cars, yachts, helicopters).
Relevance :GS III (Taxation, Inclusive Growth, Economy) + GS II (Federalism & Governance – Centre–State fiscal relations).
Key Tax Rate Changes
- Household & Middle-Class Items: Hair oil, soap, shampoo, toothbrush, toothpaste, bicycles, tableware, kitchenware → shifted to 5% from 12%/18%.
- Packaged Food Items: Namkeens, sauces, pasta, instant noodles, chocolates, coffee, butter → now at 5%.
- Agriculture & Labour-intensive:
- 12 bio-pesticides, bio-menthol → reduced to 5%.
- Handicrafts, marble, granite blocks, leather goods → shifted to 5%.
- Cement: From 28% to 18% → major boost to construction & infrastructure.
- Essential Food Products: Milk (UHT), paneer, all Indian bread (roti, chapati, paratha) → 0% tax.
- Insurance Services: Life & health insurance → 0% from 18%.
- Medicines: 33 life-saving drugs → 0% from 12%.
- Electric Vehicles (EVs): Retained at 5%.
Implications for Economy & Society
- Consumer Relief: Reduced tax burden on essential & middle-class goods → boosts disposable income.
- Healthcare Support: 0% GST on health insurance + life-saving medicines → strengthens social protection.
- Agriculture & MSME boost: Bio-pesticides, handicrafts, intermediate leather goods → lower costs, better competitiveness.
- Housing & Infrastructure: Cement rate cut to 18% → lower construction cost, supports PM Awas Yojana & infra push.
- Sustainability Push: EVs kept at 5% → consistent with green mobility goals.
Fiscal Impact
- Estimated revenue loss = ₹48,000 crore annually (based on 2023–24 consumption).
- Officials expect buoyancy effect (higher compliance + wider tax base) to offset loss.
- Real impact will depend on current consumption data.
Governance & Policy Significance
- Citizen-Centric Reform: Prioritises common man & middle class.
- Simplification: Moves away from 5-rate structure (0%, 5%, 12%, 18%, 28%) → towards 2 broad slabs + 1 special rate.
- Federal Cooperation: Reflects consensus-building between Centre & States in GST Council.
- Equity Principle: Differentiates essentials vs. luxuries/sin goods.
Challenges & Criticisms
- Revenue Stress for States: Rate cuts may strain state finances unless buoyancy materialises.
- Compliance Burden: Frequent rate changes create transitional confusion for businesses.
- Distortion Risks: 40% special rate may incentivise evasion in luxury/sin goods.
- Exemptions Expansion: More 0% items → narrows tax base, complicates GST credit chain.
Way Forward
- Monitor revenue trends → adjust compensation mechanism for states if needed.
- Improve GST compliance architecture (AI-based fraud detection, invoice matching).
- Phase out unnecessary exemptions over time to keep tax base broad.
- Balance between equity (supporting poor) and efficiency (stable revenue for states).
- Regular periodic reviews by GST Council to plug loopholes.
