Informist, Monday, Aug. 18, 2025

 

By Priyasmita Dutta and Sagar Sen

 

NEW DELHI – Prime Minister Narendra Modi made headlines with his announcement of reforms in the goods and services tax that has markets and policymakers anticipating a big boost to consumption which will eventually drive growth. But before the surge in demand materialises, a consumption shock is imminent as purchase decisions get deferred. To add to this, an overambitious target of rolling out the reforms by Diwali have further added to the uncertainty, especially because a GST rate rationalisation exercise has never worked out in such a short timeframe. So, it is fair to say, while demand may--if all things go smoothly--be robust post-Diwali, there is going to be a period of lull in the interim, experts believe.

 

Prime Minister Modi Friday said GST on regular-use items will be brought down to lowest tax rate of 5%, which will lower prices of such goods and also help small businesses. The Centre, on the very same day, also proposed moving towards a simple tax structure with just two slabs--standard and merit--from the current four-rate structure of 5%, 12%, 18% and 28%. 

 

While the above two announcements bode well for the masses, it has left analysts second guessing on the finer details of rate changes. The GST Council--which will actually have to deliver on the Prime Minister's announcement--will have to strike a balance between overall revenue buoyancy and the political divide with several states governed by non-BJP parties, while attempting to stick to the timeline. 

 

DIWALI DEADLINE

For context, the six-member Group of Ministers on rate rationalisation, headed by Bihar Deputy Chief Minister Samrat Choudhury, had already recommended rate tweaks on 148 items ahead of the December GST Council meeting which could have likely helped the government raise an additional INR 220 billion per year. The proposed changes were not taken up in the last council meeting in December as members were of the view that more details needed to be worked out before rate changes could be announced. Finance Minister Nirmala Sitharaman had then said that GST rate changes and rationalisation of tax slabs cannot be viewed in isolation and so the matter is much more complex than it seems.

 

This complexity will now have to be worked out in the next two months when analysts are unanimously of the view that majority of consumers will postpone their purchase decisions till the time GST cuts are rolled out. 

 

The six-member Group of Ministers on rate rationalisation has its task cut out for it as it will now have to run against the clock and reverse-engineer the two-slab structure for the GST Council to deliberate on. The original mandate given to the panel was to review current tax slabs and recommend changes, including the merger of tax slabs and correcting inverted duty structures and they were already working on moving to a three-slab structure. 

 

The ministerial panel, which has not held any meeting since December, is now slated to meet Thursday. According to experts, however, if a collective intent is in place, the GST Council may deliver on the "Diwali Gift". Needless to say, political divide often rears its head at the GST Council meetings, which the central government considers an exemplar of cooperative federalism. 

 

HIGH HOPES

The second problem with the government's proposal is that its success hinges entirely on the hope that consumption will spike soon after the proposed GST rate cut and that the pent-up demand will compensate for any adverse intermediate impact. 

 

As per a study done by the National Institute of Public Finance and Policy, the GST tax multiplier is higher at -1.08 when compared to personal income tax multiplier at -1.01 and corporate tax multiplier at -1.02. Through the Union Budget for 2025-26 (Apr-Mar), the government has already announced a sharp cut in personal income tax to increase disposable income in the hands of taxpayers. Ceteris paribus, the demand pick-up story stands, but in case consumption does not go up post-GST rate cuts or if there is a delay in rolling out the GST reforms, a lot will be at stake. 

 

A slowdown in activity till the time GST changes are rolled out may lead to a slight dip in tax collection, experts said, although they remained hopeful that the government would have considered economic resilience before announcing such a move. "GST has been buoyant all through and I think the government is fairly confident of the economic scenario in the country and that is why they proposed it," said Saloni Roy, Partner, Deloitte India. 

 

Cumulatively, GST collections in the first four months of FY26 grew 10.7% on year to INR 8.18 trillion, slightly lower than the 10.9% growth projected in the Budget. In a report, ICICI Bank economists said that GST changes will likely have an impact of revenue worth 0.1% of GDP for the Centre this year. This implies the government will have to forego revenue worth INR 357 billion, which means GST collections may grow only 7.6% on year this fiscal.

 

Revival in consumption after  the cut in the GST is also key as a slowdown in economic activity will directly impact corporate profits, which will have a direct bearing on corporate tax collections. According to data available till Aug. 11, gross corporate tax collections rose 8.0% on year to INR 3.33 trillion, growing at a slower pace than the 10.4% estimated in the Budget. In case corporate tax collections grow at the current pace, the government will miss its target by INR 236 billion. According to Pratik Jain, Partner, PWC India, from the day GST rate cuts are announced and till the time actual GST reduction happens, companies may offer additional discounts to woo consumers and prevent a slowdown in sales. 

 

To add to the tax collection worry, a slowdown in consumption may also adversely impact non-corporate tax collections, which have contracted 7.5% on year to INR 4.12 trillion till Aug. 11, according to the latest data. Non-corporate tax includes taxes paid by individuals, Hindu Undivided Families, firms, associations of persons, bodies of individuals, local authorities, and artificial juridical persons.  

 

Having said all this, with Diwali just two months away, the Centre will have to tread cautiously to deliver on its promises as its all-guns-blazing approach to boost consumption demand may turn out to be a double whammy if Opposition-ruled states throw a spanner in its wheel.   End

 

Edited by Akul Nishant Akhoury

 

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