An image showing coins and the word GST. For representational purposes.
Credit: iStock Photo
Every month, India’s middle class begins with a familiar loss. Almost a third of their salary disappears into income tax before a single rupee is spent. What remains is steadily eroded by the Goods and Services Tax (GST), levied on groceries, medicines, school uniforms, bus fares, and electricity bills. Technically, GST is not double taxation. But in reality, it feels exactly that: taxed once at source, taxed again at every purchase.
The government’s latest promise, GST 2.0, is being projected as a Diwali “bonus”. Four slabs are to be collapsed into two, with most goods taxed either at 5 or 18%, while a 40% bracket is reserved for luxury and sin goods. Many products currently taxed at 12% will move to 5%; a large share of those in the 28% slab will shift to 18%. Cars, insurance, appliances, and construction inputs are likely to become cheaper. The official message is clear: rate rationalisation equals relief.
For salaried households already paying a 30% marginal income tax, this offers little comfort. Simplification does not change the arithmetic: heavily taxed when they earn, and again when they spend. It is reform in design, not relief in practice. Consider a family earning Rs 50,000 a month. After income tax, they have about Rs 35,000. Every rupee of that is spent on consumption -- milk, vegetables, bus fares, children’s school supplies, and medicines -- all subject to GST. Moving some items from 12 to 5% may save a few hundred rupees, but the structural “double bite” remains. GST 2.0 does not alter this reality.
Nor does it address a deeper inequity. A National Institute of Public Finance and Policy study using the 2022–23 Household Consumption Expenditure Survey shows that in rural India, the bottom 50% of households bear 31% of the GST burden, almost identical to the 30% borne by the middle 30%. In urban areas, the pattern is similar: 29% for the bottom half, 30% for the middle. The wealthiest 20%, despite far higher incomes, account for only 37–41%.
This flat distribution is the very definition of regressivity. The shop clerk and the mid-level banker shoulder the same share of their income as GST, while the affluent escape with only a slightly higher proportion. GST 2.0 simplifies; it does not equalise.
The government’s optimism about GST 2.0 rests on tax buoyancy, the belief that a simpler structure will boost compliance and revenues faster than GDP. But buoyancy built on indirect taxes is regressive. It means the middle and lower classes, who consume nearly all they earn, are carrying the revenue surge while direct-tax bases remain narrow.
Only about 6–7% of Indians pay income tax. Direct-tax elasticity -- revenues rising strongly with income and wealth -- remains shallow. Instead, the exchequer relies on GST buoyancy: easy to collect but hardest on those least able to shield their consumption. The middle class becomes the fiscal shock absorber whenever the state seeks higher buoyancy. This is not sustainable. If GST buoyancy is celebrated while direct-tax reform stagnates, India’s fiscal tilt towards regressivity will deepen. GST 2.0 does not rebalance this.
International practice shows that buoyancy can be paired with fairness. Canada zero-rates essential groceries and medicines under VAT. The UK exempts books and staple foods. Singapore runs a permanent GST Voucher scheme with cash transfers, MediSave credits, and utility rebates for low-income households. In some years, these offsets exceed their GST outgo, making the system progressive in net terms. New Zealand retains a single-rate GST but complements it with family benefits that restore equity.
India, by contrast, has offered no systemic offset since GST’s launch. GST 2.0 focuses on simplification but ignores redistribution. A system that boasts buoyancy without fairness risks inequity and declining legitimacy. To gain legitimacy, GST must pivot from reform to relief. That means embedding quarterly GST rebates of Rs 3,000–Rs 5,000 for households below a pragmatic income threshold, credited directly to Jan Dhan or other verified accounts. Essentials –school uniforms, footwear, generic medicines, and public transport – should be zero-rated or minimally taxed, not at 12 or 18%. Input tax refunds for MSMEs must be guaranteed and time-bound so hidden financing costs do not cascade into consumer prices.
These are not abstract. A Rs 3,000 rebate could cover a month’s milk or medicines for a modest-income family. Lower GST on bicycles could cut commuting costs for lakhs of workers. Faster refunds could prevent mid-year price hikes by small manufacturers. These are household realities, not technocratic fantasies.
Ultimately, taxation is not just about raising revenue; it is about preserving trust in the fiscal contract. Citizens comply when taxes are fair, predictable, and proportionate. They will tolerate high rates if the system respects equity. But when GST is lauded for buoyancy while households see no respite, trust erodes. And once trust is taxed, compliance itself becomes fragile.
GST was conceived in 2017 as a landmark reform born of rare political consensus, a federal bargain to unify India’s market. GST 2.0 risks being remembered as a cosmetic rearrangement: administratively neat but socially blind. For the middle class, it feels like change without cure. Unless offsets balance the “double bite”, the monthly ritual will continue: income taxed at the payslip, consumption taxed at the counter, and confidence in the system taxed in between.
The most corrosive tax is not levied on income or consumption. It is levied on trust -- the citizen’s belief that the State sees them as more than a revenue source. GST 2.0 may simplify the architecture, but without moving from rationalisation to relief, from reform to fairness, it cannot win legitimacy. India has the fiscal tools, global models, and the administrative capacity to build equity into GST. What is missing is the political will to admit that efficiency alone is not enough; a truly modern tax system must also be just.
(The writer is an assistant professor at the IFMR GSB Krea University)
Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.