Will the GST rate cuts boost the economy?, Pg 11.

Key Highlights:

• Main GST slabs reduced from 0%, 5%, 12%, 18%, 28% (+ cess) to 0%, 5%, 18%, 40%.
• Compensation cess removed for most items; continues on tobacco till end-2025.
• Of 453 items revised, 413 saw tax cuts; 40 saw increases.
• Major reductions: medical products, renewable energy components, cement, consumer appliances, cars (non-luxury), and common-use goods.
• Increases: 17 luxury items (incl. luxury cars/SUVs) moved from 28% to 40%.
• Revenue implication: Centre estimates ₹48,000 crore loss; SBI study pegs it at only ₹3,700 crore.
• Opposition States demanded compensatory cess on 40% slab items — rejected by Council.

Detailed Insights:

• Historical Context: GST rationalisation was pending since 2021 when a GoM on rate rationalisation was formed. Lack of progress pushed the Centre to formally propose changes in August 2025.
• Timing: Changes coincided with the nearing end of GST compensation cess regime (legal validity till March 2026 / loan repayment). Without new rates, sin goods (esp. tobacco) would have become cheaper.
• Macroeconomic Rationale: Cuts aimed at boosting demand amid concerns of slower growth due to U.S. tariffs on Indian exports, despite robust Q1 GDP (7.8%).
• Sectoral Gains:
  • Healthcare: Medical products now at 5% – direct patient benefit.
  • Renewables: Cheaper inputs → supports India’s clean energy transition.
  • Real Estate: Cement cut (28%→18%) reduces project costs.
  • Automobile Industry: Cars/bikes (non-luxury) moved to 18%, expected sales push.
• Sectoral Concerns:
  • Textiles: Duty of 18% on garments above ₹2,500 seen as regressive.
  • Airlines: Higher GST on non-economy seats opposed.
  • Insurance: Mixed impact — GST exemption for policies boosts penetration but removal of ITC raises costs.
  • Vegetable oils/MSMEs: Issues of inverted duty and higher labour costs.
• Fiscal-Federal Dimension: With cess ending, States face revenue uncertainty; reliance on 16th Finance Commission for compensatory arrangements increases.

Concepts Involved:

• GST (Goods and Services Tax): A destination-based indirect tax on supply of goods and services, implemented from July 2017.
• Rate Rationalisation: Simplifying multiple tax slabs to reduce classification disputes, improve compliance, and broaden base.
• Compensation Cess: Levy to compensate States for GST revenue loss (2017–22, extended due to COVID loans).
• Inverted Duty Structure: When tax on inputs > tax on outputs, leading to refund and working capital issues.