On September 3, the 56th GST Council meeting, chaired by Union Finance Minister Nirmala Sitharaman, unveiled goods and services tax reforms labelled GST 2.0, which would be effective from September 22.
Listening to the longstanding demand of consumers, the changes collapse the multi-tier tax structure—with rates of 0, 5, 12, 18 and 28—into a dual-slab model of 5 percent for essentials like unpacked foodgrains, fresh vegetables and select medicines, and 18 percent for most other goods and services, including electronics, cement, small cars and electric vehicles. A 40 percent rate targets ‘sin goods’ like tobacco and pan masala.
As the GST system was flawed to begin with, any change to simplify and rationalise it is a welcome step. But the question one has to ask here is, is it sufficient?
India expects a 7.8 percent real GDP growth in the first quarter of 2025-26, painting an optimistic picture. But it masks deep economic challenges as GDP as a metric fails to capture rising inequality, weak consumer demand and high unemployment.
For nearly a decade, sluggish consumer demand has plagued India. This is evident in the latest numbers available for some bellwether industries—urban consumer goods growth slowed to 2.6 percent during January-March 2025, passenger car sales dropped 1.4 the next quarter, and two-wheeler sales shrank 6.48 percent in July over comparable periods in 2024.
The International Labour Organisation’s 2024 report revealed 83 percent of India’s unemployed are young (aged 15-29), underscoring the crisis. One of the major reasons for low consumption is increased inequality, as it reduces money in the common man’s hand and transfers it to the super rich. As per an Oxfam report from the same year, the richest 21 people in India hold as much wealth as the bottom 70 crore people put together.
As Adam Smith identified many centuries earlier, one of the major reasons for high inequality is taxation policy. Indirect taxes—which are levied on the rich and poor alike—such as GST and excise comprise about half of revenues. In contrast, it’s a third for the Organisation of Economic Co-operation and Development countries. The Indian incidence disproportionately burdens the poor, who spend 22 percent of their income on fuel—the highest share globally—due to 300 percent excise duty hikes since 2014.
The 2025 GST reforms, with a dual-slab model (5 percent for essentials, 18 percent for most goods), offer limited relief but fail to address fuel duties.
This regressive taxation stems from offsetting corporate tax cuts (35 percent to 22 percent), costing ₹2 lakh crore, which failed to boost investment, with private gross fixed capital formation at an 11-year low of 32.4 percent in 2023-24, down from 40 percent in 2015.
The Oxfam report shows the top 1 percent hold 40.1 percent of wealth, draining resources from 70 crore poorer citizens. To revive demand, the government must reduce fuel excise duties and reconsider corporate tax cuts, as lower oil prices would ease costs across goods, spurring consumption and economic recovery.
Though the latest changes are hailed as a revolutionary reform, more anomalies remain in the GST rates for items, revealing inequities and irrationality. Ultra-luxury items like polished diamonds enjoy nil tax under specific schemes, boosting a ₹1.2-lakh-crore sector, while processed agricultural products—crucial for reducing 30 percent produce waste worth ₹92,651 crore a year—face 18 percent GST, stifling Tamil Nadu’s 70 lakh farmers. Zero-rating these could boost farmer incomes by 20-25 percent, per the Indian Council of Agricultural Research.
The textile sector, employing 4.5 crore nationally and 1 crore in Tamil Nadu, faces 18 percent on garments above ₹2,500, undermining competitiveness amid 50 percent US tariffs and a 10 percent export decline in 2023.
While 33 lifesaving drugs are now exempt, diagnostic kits and medical devices, at 5-18 percent, burden Tamil Nadu’s healthcare system that serves 7.8 crore people, hampering affordability and access. These disparities highlight the reforms’ failure to support critical sectors and state economies.
The latest reforms failed to democratise the GST Council, where the Centre holds 33 percent of the total votes and each state, irrespective of their size or economic output, have 2 percent. With each resolution requiring 75 percent votes to pass, passing any resolution without the consensus of the Union government has become impossible.
Only four states—Tamil Nadu, Karnataka, Telangana and Maharashtra—contribute about 50 percent of total GST collection, but have only 8 percent of the GST Council votes; they cannot, therefore, pass any resolution on their own.
A lack of consultation can also be evinced from the half-backed rollout of GST 2.0. The states were not fully consulted about the resulting loss of revenue and how it would be offset. The ideal step would have been for the Union government to work on a financial model to see the range of revenue losses for each state, and discuss with them on offsetting their losses. This affects industrialised states like Tamil Nadu, which could lose potentially ₹6,000-15,000 crore revenue for the next fiscal year. So high net GST-contributing states would now face lower GST revenue.
In order to compensate for the sudden revenue loss for states, the Union government should consider extending the compensatory cess that can undo the partial loss of revenue. Though the Finance Commission has recommended 42 percent of the revenue from divisible pool to be divided among states, only 31 percent is devolved with the states, simply because of very high cess and surcharge (which constitute the non-divisible pool) of 23 percent.
The Union government should consider reducing the non-divisible pool and extend the divisible pool. The Fiscal Responsibility and Budget Management Act’s debt cap of 25 percent of gross state domestic products, with a 3 percent fiscal deficit (extendable to 3.5 percent), constrains Tamil Nadu. Relaxing the cap to 30 percent would help states, ensuring fiscal autonomy and driving India’s growth.
The intent to simplify taxation is welcome and will ease some burden off the common man. But reforms without robust safeguards for state federalism and finances risk reducing states to municipalities. States need fiscal autonomy to provide basic infrastructure—such as education and healthcare—and welfare schemes for its population. Only if individual states grow can the country grow as a whole.
Salem Dharanidharan | Spokesperson of the DMK and Deputy Secretary of the party’s IT wing
(Views are personal)