GST 2.0: Can Tax Cuts Power India’s Growth Story?
By Sanjeev Oak
India’s GST Council has slashed rates across essentials and growth sectors, aiming to boost consumption at a time of global slowdown. Finance Minister Nirmala Sitharaman calls it a rationalisation, not a giveaway—betting that demand-led growth will outweigh revenue risks.
The GST Council’s recent overhaul is more than a rejig of slabs. It is a strategic gamble on consumption-led growth at a time when global headwinds threaten to slow India’s momentum.
The Big Reset
The Goods and Services Tax, often described as India’s most ambitious tax reform since independence, has seen its fair share of turbulence—confusing slabs, compliance hurdles, and revenue anxieties. Yet, the recent move by the GST Council marks a significant course correction.
From five tax slabs, the system has been rationalised into a three-tier structure:
- 5% on essentials
- 18% as the standard rate
- 40% on sin and luxury goods
Daily-use items such as soaps, bicycles, medicines, and spectacles have been shifted to lower brackets. Tractors, irrigation equipment, and health insurance premiums have also been eased.
Finance Minister Nirmala Sitharaman described the exercise as “not piecemeal tinkering, but a conscious rationalisation designed to balance affordability with revenue integrity.”
“GST reform lowers prices, boosts sentiment, and sustains fiscal discipline.”
— Nirmala Sitharaman, Finance Minister
Why the Timing Matters
The cuts come on the eve of the festive season, when household spending peaks. India’s policymakers have been watching consumption patterns closely. With exports softening under global trade pressures, domestic demand is now the primary engine of growth.
The Finance Minister underlined the intent:
“When households spend more during festivals, lowering taxes ensures that demand is met, not dampened.”
The Council’s decision is also about perception. By easing tax burdens on everyday consumption, the government signals that growth will not be sacrificed at the altar of fiscal orthodoxy.
Who Benefits?
The impact of these reforms will ripple across segments of the economy:
- Consumers: Everyday essentials become cheaper, putting more disposable income in people’s hands. Medicines, health insurance, and wellness services will also be more affordable.
- Farmers: With tractors and irrigation equipment now taxed lower, the cost of cultivation falls, potentially easing rural distress.
- Middle-class Households: Hotel stays, appliances, and vehicles become lighter on the pocket, encouraging discretionary spending.
- Industry & MSMEs: Fewer slabs mean simplified compliance, faster refunds, and smoother credit cycles—long-standing pain points for small businesses.
The Confederation of Indian Industry (CII) has already noted that “lower GST on autos and appliances could trigger a fresh demand cycle.”
The Fiscal Question
The immediate concern is fiscal. Revenue foregone from these cuts is estimated at nearly ₹48,000 crore. With states still recovering from the pandemic-induced shortfall and compensation cess under dispute, the timing appears risky.
But Sitharaman countered the scepticism:
“Tax rationalisation is not about giving up revenue—it is about broadening the base and building compliance.”
Indeed, earlier rounds of GST cuts have shown that when slabs are rationalised, compliance improves, evasion falls, and collections eventually recover. The government is betting that growth-driven consumption will replenish revenues over the medium term.
The Global Backdrop
The GST reset comes against an uncertain global economic backdrop. The U.S. is grappling with tariff wars, Europe is struggling with inflation, and China’s recovery remains fragile.
India, in contrast, posted 7.8% GDP growth in Q1 FY26. By cutting taxes now, New Delhi is sending a counter-cyclical signal—stimulus through consumption rather than austerity.
As Sitharaman remarked:
“While others are raising barriers, India is lowering them—to create confidence in both consumers and investors.”
A Political Undertone
Tax policy is never divorced from politics. With general elections on the horizon, the GST cuts are bound to be read as a populist gesture. Critics have already questioned whether this is fiscal prudence or electoral calculus.
Yet, the structure of the cuts suggests otherwise. Relief has been targeted at essentials and growth sectors rather than being across the board. The message is one of strategic reprioritisation rather than indiscriminate giveaways.
The Road Ahead
NITI Aayog economists estimate that consumption could add 0.4–0.6% to GDP over the next year due to GST rationalisation. If paired with ongoing infrastructure spending, Production Linked Incentive (PLI) schemes, and income tax reforms, the cumulative effect could be significant.
The risk, however, lies in the Centre–State balance. States, already concerned about compensation cess expiring, may resist further revenue pressures. Cooperative federalism, which underpins GST, will be tested once again.
A Strategic Bet
The GST rate cuts are not just about arithmetic—they are about strategy. At a time when global turbulence threatens to dent growth, India is choosing to bet on its own consumers. By rationalising slabs, easing compliance, and targeting relief where it matters most, the government is gambling that demand-led recovery will outweigh revenue risks.
If the bet pays off, GST 2.0 may well be remembered as the moment when India turned tax reform into growth reform.