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05 Sep 2025 : Cuts in time

 Editorial 1: ​Cuts in time

Context

By cutting GST rates, the government aims to revive spending at home, offsetting the pressure from sluggish export growth.

 

Introduction

The recent GST rate cuts, approved in the 56th GST Council meeting, represent a bold step towards stimulating demand and reviving economic momentum. Coming soon after the Prime Minister’s Independence Day address, these reforms signal a renewed push for simplification, lower tax burden, and stronger consumption growth at a time when other economic drivers appear weak.

Positive Impact of GST Reforms

  • Recent GST changes approved by the GST Council have boosted public sentiment and may stimulate the economy.
  • Tax cuts are among the most effective tools to increase demand and optimism.
  • The Centre’s push for reforms helped the Council clear them quickly.

Timing and Criticism

  • Concerns that reforms came “too late” are misplaced.
  • As a federal body, the GST Council allowed States to suggest cuts earlier, but none did.
  • The Prime Minister’s announcement before formal discussions raised questions, but:
    • The Council endorsed decisions on the first day of its two-day meeting.
    • This reflected strong consensus among the States.
  • The minutes of the 56th meeting will clarify the individual positions of members.

Scope of Rate Changes

  • Broad coverage: Most sectors saw reductions in tax rates.
  • Exceptions: Only a few items, such as luxury motorcycles and high-priced apparel, became costlier.
  • The 40% tax bracket was kept narrow, avoiding overburdening it with new items.
  • Together with the income tax cuts in Budget 2025, these changes should:
    • Strengthen consumption demand.
    • Compensate for weak exports and private investment.

Fiscal Implications

  • Government estimates ₹48,000 crore annual revenue loss, based on 2023-24 consumption.
  • Actual loss may be higher given the scale of cuts.
  • Compensation cess was abolished despite demands from Opposition States.
    • Keeping the cess would have weakened simplification efforts.
    • States must now rely on their own revenues and the 16th Finance Commission for support.

Structural Improvements

  • GST 2.0 is still somewhat complex, but notable improvements include:
    • Removal of duty inversions.
    • Simplification of paperwork.
  • To ensure benefits reach consumers, the government should:
    • Revive the National Anti-Profiteering Authority (NAA) temporarily.
    • Monitor price pass-through once changes take effect on September 22.

 

Conclusion

The new GST 2.0, despite lingering anomalies, reflects a strong commitment to rationalisation and ease of compliance. By reducing duty inversions, abolishing the compensation cess, and aligning with income-tax cuts, it offers a timely boost to public confidence and the economy. Ensuring that benefits are passed on to consumers will be the real test of these reforms.