GST Rate Cuts: Economic and Political Dimensions

On August 15, 2025, in his Independence Day address, Prime Minister Narendra Modi announced sweeping reforms in the Goods and Services Tax (GST) structure to be implemented by Diwali.

- Dr. Rajiv Khosla and Madhur Ojha

He stressed the need to simplify GST and ease the burden on the common citizen. Following this, the GST Council, in its meetings on September 3 and 4, 2025, decided to reduce GST rates and rationalize slabs. The stated aim was to lower the prices of essential goods and provide relief to households.

The Council reduced the number of slabs from five (0%, 5%, 12%, 18%, and 28%) to three (0%, 5%, and 18%). However, the persistence of a 3% slab on gold and the creation of a 40% slab on luxury and sin goods (such as tobacco and pan masala) means the effective structure still contains five slabs. In practice, therefore, the framework has not changed as drastically as announced. That said, GST on daily-use items—soap, shampoo, toothpaste, snacks, chocolates, dairy products—was slashed from 12% or 18% to 5% or even zero. Taxes on medicines, medical equipment, automobiles, and health and life insurance were also reduced or waived.

On September 21, 2025, Modi addressed the nation again, declaring September 22-29 as “Bachat Diwas” to encourage savings and promote the benefits of the GST cuts. These changes took effect on September 22. Supporters and government representatives framed the move as a counter to U.S. President Donald Trump’s 50% tariff on Indian imports. Analysts at Citi Group, Nomura, and Morgan Stanley estimated U.S. tariffs could shave 0.6%-1.1% off India’s GDP. GST cuts, they argued, could offset this by boosting domestic demand. Indian financial institutions have projected that GST 2.0 could add 0.2%-0.7% to GDP growth.

Yet the question remains: why would the government reduce GST, a cornerstone of its revenue? The Union Budget 2025 documents reveal that GST contributed 27.5% of central tax revenue in 2024-25 and is projected to remain at that level in 2025-26. Collections in 2024-25 stood at ₹10.61 lakh crore, expected to rise to ₹11.78 lakh crore in 2025-26. This makes the reform a gamble with substantial fiscal consequences.