Balancing Growth and Revenues

While GST rate rationalisation reduces complexity and lowers compliance costs, con- cerns over shrinking state revenues could trigger fresh demands for compensation

- HARI KRISHNA DWIVEDI

The GST Council in its 56th meeting on September 3, 2025, approved a rationalised GST tax structure by collapsing the 12 per cent and 28 per cent of the four-rate structure into two rates, 5 per cent "merit rate" for essential goods and 18 per cent "standard rate" plus a special 40 per cent "demerit rate" on select sin and luxury items. The new rates will become effective from September 22, 2025.

The present rate restructuring was preceded by two much smaller exercises in rate reduction in 2017 and 2018. However, the present exercise is much more far-reaching and comprehensive, covering more than 450 goods and services. With this restructuring of rates, the effective tax rate of GST is estimated to be lowered to around 9.5 per cent from the existing 11.6 per cent. It may be pointed out that at the time of the introduction of GST in July 2017, the effective average GST rate was 14.4 per cent, which fell to 11.6 per cent as a result of the earlier rejigging of rates.

The decision of the Council is a welcome move towards a 'Good & Simple Tax'. India is among the very few countries in the world to have such a complex rate structure that largely contributed to high compliance costs, encouraged tax evasion and militated against ease of doing business. The much-awaited reforms address the crying need to simplify the complex rate structure to obviate ills of classification disputes, inverted duty structure, complexity in GST architecture and ease compliance.