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GST Reforms 2025
Context: Recently the GST Council approved India’s most comprehensive tax reform since 2017, replacing the previous four-slab GST system with a simplified three-slab structure.
Goods and Services Tax (GST) is a comprehensive, destination-based indirect tax levied on the supply of goods and services, replacing a multitude of pre-existing central and state taxes such as VAT, excise duty, and service tax since its launch on July 1, 2017.
What Are the Recent Reforms Made in the GST?
- Simplification of GST rate slabs from four (5%, 12%, 18%, 28%) to three: 5% for essentials, 18% as the standard rate, and 40% for luxury or “sin” goods.
- Essential items—including health insurance, household goods, educational materials, select agricultural inputs—now taxed at 5% or even nil.
- Dispute-prone categories (such as consumer durables, automobiles) moved to the uniform 18% slab or reclassified, reducing classification disputes.
- Certain healthcare and educational services have been fully exempted from GST. For example, doctors’ consultation without admittance to hospital, services related to mid day meals, etc.
- The 40% “de-merit” rate applies only to luxury goods and socially harmful products (high-end autos, tobacco, gambling), replacing the older 28% plus cess model.
What Are the Benefits Associated With It?
- Lower inflation as daily-use items, healthcare, and education see rate cuts.
- Greater ease of living and business, with fewer slabs and disputes.
- Support for MSMEs and manufacturers through corrected inverted duty structures and reduced input costs.
- Increased consumption and demand revival in key sectors (FMCG, autos, consumer durables).
- Wider tax net as compliance becomes simpler and more attractive.
- Social protection for vulnerable groups via exemptions in healthcare and insurance.
What Are the Underlying Challenges?
- Short-term revenue loss estimated at ₹48,000 crore, with recovery dependent on increased compliance and consumption.
- Possible resistance from luxury and high-end sectors facing the new higher tax rate.
- Need for effective implementation, digital infrastructure upgrades, and ongoing monitoring of rate impacts.
- Ensuring benefits are passed to consumers and not absorbed in supply chains.
- Adapting to transitional glitches and ensuring smooth migration for businesses previously operating under the old system.
The GST 2.0, adopted amid export challenges and US sanctions, is poised to strengthen India’s domestic market and boost export competitiveness, thus helping India navigate global trade pressures and sustain economic growth.
