Context

• On 20th August 2025, the Government of India announced a $20 billion fiscal stimulus package with a major GST (Goods and Services Tax) reform aimed at boosting domestic consumption and sustaining economic growth amid global uncertainties.

• This reform is being seen as one of the biggest tax policy overhauls since GST’s launch in 2017.

Key Features of the Reform

1. Simplification of GST Slabs

   • Earlier → Multiple slabs (0%, 5%, 12%, 18%, 28% + cess).

   • Now → Only two effective slabs remain:

     • 5% – Essential and daily-use items.

     • 40% – Luxury and sin goods (cigarettes, alcohol, etc.).

2. Focus on Compliance

   • Reduced complexity → Less confusion for businesses.

   • Expected to bring more small businesses into the formal tax net.

3. Revenue Neutrality Concern

   • While simplification improves compliance, states fear short-term revenue losses due to the removal of mid-slabs.

4. Fiscal Stimulus Element

   • This reform is part of a ₹20 billion package designed to counter external shocks (e.g., U.S. tariffs on BRICS).

Expected Impacts

Positive Impacts

• Boost to Consumption: Lower tax burden on essentials → higher disposable income → increased domestic demand.

• GDP Growth: Economists project +0.6% annual GDP growth due to the reform.

• Ease of Doing Business: Simplified tax regime reduces compliance cost for MSMEs.

• Transparency & Formalization: Better compliance reduces tax evasion and expands the tax base.

Challenges / Criticism

• Revenue Concerns: High reliance on 40% slab may distort consumption patterns.

• State Autonomy: States may demand higher compensation for potential losses.

• Inflationary Pressure: Goods shifted from 18% to 40% could become costlier, affecting middle-class consumption.

• Black Marketing Risk: Very high tax on sin goods may encourage illegal trade.

Comparative Perspective

• Global Practices:

  • Most countries with VAT/GST maintain 2–3 slabs for simplicity.

  • India’s earlier multi-slab structure was often criticized as “too complex.”

• Previous Reform Attempt: The 15th Finance Commission and GST Council had earlier recommended merging slabs, but political consensus was lacking.

UPSC Relevance

Prelims

• Direct Questions on GST structure, year of introduction, slabs, and constitutional provisions (Article 279A, GST Council).

• Example: “Which of the following taxes were subsumed under GST?”

Mains (GS Paper 3)

• Topic: Indian Economy – Mobilization of resources, growth, and development.

• Possible Question:

  • “Critically analyze how simplification of GST can act as an economic stimulus for India, while also discussing the challenges of implementation.”

Answer Framework for Mains:

1. Intro → Mention reform + context of slowdown & stimulus.

2. Body → (a) Key features, (b) Positive impacts (growth, compliance, consumption), (c) Challenges (revenue, federal concerns).

3. Way Forward → Balance simplicity with revenue neutrality, strengthen GST Council consensus, enhance IT-enabled monitoring.

4. Conclusion → GST reform is a “step towards One Nation, One Market, One Tax” but requires careful calibration.