Cuts in time: on the new GST system  

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The sweeping changes to the Goods and Services Tax (GST) regime, authorised by the GST Council on Wednesday, have come as a shot in the arm for the mood of the people, and, potentially, for the economy overall. Few things spur optimism and demand as effectively as tax cuts. The Centre did well to push the GST Council towards these reforms, which rose to the occasion and cleared them quickly. Criticism that these reforms have come too late is neither here nor there. The GST Council is a federal body, and any of the States could have suggested these rate cuts earlier but did not. The appropriateness of the Prime Minister’s announcement of the reforms in his Independence Day speech, coming as it did before either the relevant Group of Ministers or the GST Council met, can be questioned. But here, too, the fact that the Council announced its decisions on the first day of what was supposed to be a two-day meeting shows that the States were on board. The minutes of the 56th meeting will reveal each member’s stated position. The rate changes span nearly every sector, and are, overwhelmingly, in the downward direction. Very few items, such as high-end motorcycles and higher priced apparel, are set to become more expensive. Tempting as it was to pack the 40% bracket with more items, the GST Council did well to keep it narrow. Overall, these rate cuts, coupled with the income-tax rate cuts announced in Budget 2025, should serve as a much-needed boost to consumption at a time when other engines of growth such as exports and private investment are sputtering.

The government has maintained that the revenue implication of these GST rate cuts would be around ₹48,000 crore a year, based on 2023-24 consumption data. Given the scope of the cuts, this seems like an underestimation. However, only time will tell what the actual number will be. It is to be noted that the GST Council decided to do away with the compensation cess, despite Opposition-governed States calling for one to protect their revenues. Such a cess would have diluted the rate rationalisation and simplification efforts and is best eschewed. Instead, the States are now going to have to look to their own revenue sources, as well as the 16th Finance Commission, to offset the losses they face. The new GST 2.0 still has some anomalies, and is still more complicated than it needs to be, but the removal of duty inversions and the easing of paperwork are a huge improvement. The government should now revive the National Anti-Profiteering Authority, at least temporarily, to ensure that the rate cuts are passed on once they kick in on September 22.