GST reform: Relief at home, strength for industry, and resilience abroad

The 56th meeting of the Goods and Services Tax (GST) Council has produced one of the most significant reforms in India’s indirect taxation system since the GST was first rolled out in 2017. By simplifying the rate structure, rationalis-ing anomalies, and offering sweeping relief in critical sectors, the Council has sought to rebalance India's tax regime at a moment when global trade tensions are rising and domestic demand needs fresh momentum.

- DR.MAINAN RAY & SUKANATA CHAKARBARTY

In this article an attempt has been made to assess its impact on households, on industry, and on India’s position in the global economy. It also considers the fiscal trade-offs and institutional challenges that accompany such an ambitious recalibration.

RECONCILEMENT OF RELIEF FOR HOUSEHOLDS AND LOWERING TAXES ON ESSENTIALS AND

HEALTH SECURITY

The new structure reduces GST on a wide basket of house hold goods like soaps, shampoos, toothpaste, toothbrushes, hair oil, bicycles, and kitchenware have moved into the 5% bracket from earlier rates of 12-18%. Staple foods such as packaged milk, paneer, and Indian breads like roti and paratha are now fully exempt. Processed foods such as chocolates, noodles, pasta, and namkeens have seen tax rates cut from 18% to 5%.

Analysts estimate that urban households could see a decline of 8-10% in monthly expenditure on essential goods by dint of this indirect tax relief.

The most transformative change, however, is in the insurance sector. Until now, all life and health insurance premiums carried 18% GST, adding a significant burden on policyholders. This has now been abolished, making both categories fully tax-exempt. The move is expected to stimulate higher insurance penetration in a country where coverage remains worryingly low.

Currently, India’s insurance penetration is around 4% of GDP, compared to a global average of about 7%. By removing the tax wedge, the Council has lowered barriers for families to purchase protection. Hypothetically, if even 50 million additional families take up health insurance with an average annual premium of Rs 20,000, the market could expand by over Rs 1 lakh crore. The implication is clear that more households covered, fewer families pushed into poverty by medical shocks, and stronger demand for formal insurance products.