The GST Council’s recent decision to collapse India’s multi-tiered indirect tax structure into a simplified two-rate system—retaining only the 5% and 18% slabs—has been hailed by the Union government as a landmark reform. Finance Minister Nirmala Sitharaman declared the move as one that “benefits the common man,” citing reduced prices for daily-use items like soap, shampoo, toothpaste, and bicycles. The announcement, timed just ahead of Navratri and a string of state elections, was framed as a consensus-driven step toward simplification and relief. Yet, beneath the celebratory tone lies a complex and contested terrain of fiscal trade-offs, political maneuvering, and federal tensions that demand deeper scrutiny.

The reform, effective September 22, 2025, marks a significant shift in India’s Goods and Services Tax regime. Since its rollout in July 2017, GST has been both praised for unifying the tax system and criticized for its operational complexity, compliance burdens, and erosion of state fiscal autonomy. Originally structured around four primary slabs—5%, 12%, 18%, and 28%—the system also included numerous exemptions and special rates, leading to classification disputes and administrative confusion. The new structure retains only the 5% and 18% slabs, with a separate 40% rate for sin and luxury goods. While the simplification may ease compliance for businesses, it raises critical questions about revenue sustainability, equity, and the real beneficiaries of the reform.

According to government estimates, the rate cuts will result in a revenue loss of ₹47,700 crore annually. The Centre argues that this loss will be offset by increased consumption and improved compliance, but many state finance ministers remain unconvinced. States like Tamil Nadu, Kerala, Punjab, and West Bengal have long expressed concerns about declining GST revenues and the expiry of the compensation mechanism in 2022. Under the original GST agreement, the Centre had promised to compensate states for any revenue shortfall for five years. With that window closed, states are now exposed to fiscal risks without a clear roadmap for support. “We are being asked to accept a revenue sacrifice without any clarity on compensation,” said Tamil Nadu’s Finance Minister Palanivel Thiaga Rajan in a closed-door meeting. His concerns echo a broader unease among opposition-ruled states, many of which have flagged the reform as politically timed and fiscally opaque.

The selection of items moved to the 5% slab appears curated for maximum political mileage. Personal care products, packaged snacks, footwear under ₹2,500, small motorcycles, and renewable energy devices are among the goods now taxed at the lower rate. While this may offer relief to consumers, the reform conspicuously avoids zero-rating truly essential items like sanitary pads, school supplies, and basic healthcare services. “If the goal was equity, why not extend relief to the most vulnerable segments?” asks Yamini Aiyar, President of the Centre for Policy Research. “The reform seems more concerned with optics than outcomes.” Her critique underscores a deeper tension between the stated intent of the reform and its actual design.

Moreover, the reform sidesteps the issue of inverted duty structures—a long-standing problem where inputs are taxed higher than outputs, leading to blocked input tax credits and hurting manufacturers. While some corrections have been made in textiles and fertilizers, the broader issue remains unresolved. The GST Council’s decision also leaves the services sector largely untouched, despite its significant contribution to GDP and tax collections. Education, insurance, and healthcare continue to face ambiguous tax treatment, creating compliance burdens and pricing distortions. For small businesses and MSMEs, the new structure may reduce classification disputes, but without administrative reform, the system remains opaque and burdensome. The GST Network’s glitches, delayed refunds, and audit pressures continue to plague enterprises that form the backbone of India’s economy.

The claim of “unanimous consensus” also warrants skepticism. While the Council operates on a voting mechanism weighted between the Centre and states, dissenting voices are often muted in official narratives. In previous meetings, opposition-ruled states have demanded greater transparency, real-time data sharing, and a relook at the GST Network’s functioning. The current reform, announced with fanfare, offers no public documentation of deliberations, dissent notes, or impact assessments. “This is not how cooperative federalism should work,” says Dr. Praveen Chakravarty, political economist and Congress strategist. “States are being strong-armed into accepting decisions that affect their fiscal health.”

From a macroeconomic perspective, the reform may offer short-term consumption stimulus, but its long-term sustainability is questionable. India’s tax-to-GDP ratio remains low, and indirect taxes like GST disproportionately affect lower-income groups. Without widening the direct tax base or improving compliance, the revenue foregone through rate cuts could lead to higher borrowing or cuts in public spending. The Centre’s bet on increased consumption translating into higher collections is speculative at best. “We’ve seen this playbook before,” says economist Jayati Ghosh. “Tax cuts without structural reform rarely deliver the promised growth.”

There’s also the question of whether this reform addresses the original promise of GST: a transparent, efficient, and equitable tax system. The multiplicity of exemptions, frequent rate changes, and lack of clarity on input credits have made GST compliance a nightmare for small businesses. The new two-slab structure may reduce classification disputes, but without administrative reform, the system remains opaque and burdensome. The GST Network’s glitches, delayed refunds, and audit pressures continue to plague MSMEs, who form the backbone of India’s economy.

The political timing of the reform cannot be ignored. Announced just before Navratri and ahead of elections in Maharashtra, Haryana, and Jharkhand, the move is clearly designed to signal pro-poor intent. The Centre’s messaging emphasizes relief for the “common man,” but the selective nature of the rate cuts and the absence of structural fixes suggest a more calculated strategy. “This is classic pre-election maneuvering,” says Prof. R. Ramakumar of TISS. “The government is trying to signal empathy with the middle class and working poor, while avoiding deeper questions about GST’s architecture and its impact on state finances.”

In the end, the GST rate rationalization appears to be a political gesture dressed as economic reform. It offers selective relief, avoids hard questions, and risks deepening fiscal asymmetries between the Centre and states. For taxpayers, the immediate benefit may be a few rupees saved on shampoo or namkeen, but the larger issues of transparency, equity, and federal accountability remain unresolved. As India heads into another election cycle, the question is not whether the government is working for the people—but whether it is willing to confront the systemic flaws that keep its flagship reforms from delivering real change.