GS 3 – ECONOMY
Background
- On September 3, 2025, the GST Council announced a revision in indirect tax rates.
- Goods and Services Tax (GST) on several items, especially food items and essential goods, has been reduced.
- The aim is to support consumption, ensure affordability, and promote growth.
- However, concerns remain about revenue implications and sectoral imbalances.
What prompted these changes?
- The rationalisation process has been ongoing since GST rollout in 2017.
- The GoM on GST rates, chaired by the States, reviewed suggestions from sectors.
- The Ministry of Finance and Prime Minister Narendra Modi announced reforms aimed at “next-generation GST reforms.”
- The revisions aim to address high tax burdens and ensure ease of doing business.
Key changes in tax rates
- Several products have seen cuts from 28% to 18%, and some from 18% to 12% or lower.
- Compensation cess over and above the 28% slab has been reduced in many cases.
- Tobacco products remain largely unaffected except where necessary adjustments are required.
- Petrol and diesel remain outside the GST framework.
Why the rate cuts were necessary
- Aimed to boost consumption by making products affordable.
- Lower rates encourage economic activity in sectors affected by high taxes.
- Helps counter global inflationary pressures.
- Aligns with government expectations of demand revival and GDP growth.
Revenue implications
- The Centre estimates a loss of ₹48,000 crore in annual revenue.
- Compensation to states will require alternative sources of funding.
- States have been asked to explore ways to make up for the shortfall, potentially through the 16th Finance Commission.
- Experts note that the long-term impact depends on how effectively demand and production respond.
Which sectors are benefiting?
- Healthcare industry: Benefited from GST reduction, especially medical devices.
- Renewable energy sector: Praised cuts on solar products and related items.
- Food and essential goods: Prices expected to drop, boosting demand.
- Textiles and MSME sector: Labour charges reduced, helping growth.
Which sectors are concerned?
- Luxury goods, automobiles, and non-essential items: Likely to see less demand due to reduced spending.
- Aviation and travel sectors: Impact uncertain as fuel remains outside GST.
- Tobacco products: Retained at higher tax slabs, affecting sales.
Future outlook
- Rate cuts expected to stimulate consumption but must be complemented by reforms in logistics, production, and supply chains.
- Focus on rationalising rates without harming state revenues.
- Monitoring demand recovery and inflation trends will guide future fiscal policies.