[Answered] Proposed GST reforms aim to boost consumption by lowering tax slabs. Evaluate the potential fiscal implications and economic benefits of such a reform for sustainable and inclusive growth in India.

Introduction

The GST reform proposals to rationalise tax slabs mark a watershed in India’s indirect tax regime. They promise consumption stimulus but raise fiscal challenges, demanding careful balancing for inclusive growth.

GST and Its Evolution

1. Introduced in 2017, GST subsumed multiple indirect taxes into a unified regime.
2. India adopted a multi-rate structure (0%, 5%, 12%, 18%, 28%), unlike many countries with a single or dual rate, to balance revenue and equity.
3. Despite being hailed as a “Good and Simple Tax”, GST has faced criticism for complexity, litigation, and compliance burden.

Proposed Reforms

1. Rate Rationalisation: Shifting 99% of items from 12% slab to 5%, and 90% of items from 28% to 18%. Reducing multiplicity of slabs → fewer disputes and simpler compliance.
2. Procedural Ease: Simplifying registration, return filing, and faster refunds. Reducing scope for input tax credit (ITC) frauds, which accounted for ₹55,000 crore in fake claims (CBIC, 2023).
3. Complementary to Direct Tax Reforms: Along with new Income Tax Bill and revised slabs (Budget 2025) → a holistic tax reform moment.

Potential Economic Benefits

1. Boost to Consumption: Lower rates → more disposable income for the middle class. Example: FMCG and consumer durables, heavily taxed at 28%, would become more affordable, stimulating demand. RBI estimates GST cut could lift private consumption expenditure (currently 57% of GDP) significantly.
2. Formalisation of the Economy: Lower compliance burden encourages MSMEs to enter GST net. Wider base → long-term revenue stability.
3. Growth & Investment Multiplier: By reducing litigation and easing refunds, working capital lock-ups will ease. Higher demand boosts capacity utilisation → incentives for private investment.
4. Equity and Inclusivity: Essential goods and services become more affordable. Women-centric consumption (hygiene products, household items) taxed at lower rates → social inclusion.

Fiscal Implications

1. Revenue Shortfall: RBI (2022) estimated effective GST rate at 11.6%; post-reform this may fall to ~9%. Short-term revenue hit could strain Centre and States, especially since compensation cess ended in 2022.
2. Impact on States: States already seek higher devolution from the 16th Finance Commission. Lower GST revenue makes inclusion of petroleum, alcohol into GST less likely, leaving States dependent on high-yield “sin taxes”.
3. Risk of Fiscal Slippage: At a time of high infrastructure spending and welfare commitments, lower tax revenues may expand fiscal deficit unless offset by buoyant consumption.

Way Forward

1. Phased Implementation to manage revenue loss.
2. Compensation Mechanism for States – perhaps a GST Stabilisation Fund.
3. Widening Tax Base – include high-revenue items like petroleum in medium term.
4. Leveraging Technology – AI-based GSTN monitoring to plug leakages.
5. Global Lessons – Countries like Australia and Malaysia simplified GST/VAT to 1-2 slabs, boosting compliance and stability.

Conclusion

GST rationalisation promises a consumption-led growth push and tax simplicity. But ensuring fiscal sustainability, state cooperation, and inclusive benefits will be key for India’s long-term equitable development trajectory.