GST 2.0 | Government trading fiscal pain for political gain

The GST Diwali gift is a populist measure aimed at wooing voters ahead of a key election.

On August 15, wrapped in talk of next-generation GST reforms, Prime Minister Narendra Modi delivered a Double Diwali Dhamaka to please the masses and the middle-class.

Though it initially proved to be a tactical mistake as consumers postponed purchases, the government acted fast to get the GST Council rubber-stamp its proposals on September 3 to make the lowered GST rates effective from September 22.

What is the reform quotient of the reloaded GST 2.0? Is it a populist gamble? What is the fiscal hit?

A dose of reform

The reloaded GST system reduces five primary tax rates (5%, 12%, 18%, 28% and 28% plus GST Cess) into three (5%, 18% and 40%).

This streamlining of GST rates will not only simplify administration but also help avoid classification disputes (remember popcorn) and solve problems of inverted duty structure (though some new ones may emerge).

Reloading of GST in three primary rates is indeed creditable, which is likely to stay for quite some time. In India’s context, there is not much rationale in the purists’ pitch for a single GST.

While the rate reforms will rationalise the currently prevailing 45 tax rates (yes, in total), still many rates remain — 0% for exempt goods, 0.1% for imitation jewellery (export), 0.25% for precious stones, 1% for housing less than 45 lakh, 1.5% for affordable housing, and 3% for precious metals/jewellery.

In addition, composition schemes of 1% (manufacturers/traders with less than Rs 1.5 crore turnover), 5% (standalone restaurants) and 6% (other service providers) also continue. Goods dealers with less than Rs 40 lakh and service providers with less than Rs 20 lakh turnover are not required to register under GST.

The September 3 reforms are important; yet, a big GST reform agenda remains.

Populism writ large

Modi’s announcement, without institutional authority to pre-empt the GST Council, was clearly meant to limit the credit of the GST bonanza to the prime minister only.

A clear focus of the massive GST ‘gift’ was to please the masses (bulk voters) and middle-class (vocal voters). While almost all goods of mass consumption are in the zero and 5% slab, the middle-class will benefit from a massive lowering of GST rates from 28% to 18% and a shift of 12% into 5% or 0%.

Items like cheese, insulin, and pasta, among many, have been shifted to the 5% slab from 12%. Chocolates, pastry, mineral water, etc. have been shifted from 18% to 5%. Pizza bread goes from 5% slab to nil, while parathas go from 18% to nil.

Non-food items that the middle-class use are not left behind either. Marble and granite blocks have been shifted from 12% to 5% and most drugs and medicines from 5% and 12% to nil. Shampoo, dental floss, and shaving cream (among many) go from 18% to 5%.

The biggest Diwali gift to the middle-class came in the form of GST reduction from 28% to 18% on assets of middle-class aspiration — cars, air conditioners, dishwashers, television sets, and small cars.

The government issued a flurry of advertisements the next day to relay this central message- the ‘Historic Diwali Gift for the Nation’.

Populism and vote politics are writ large over the entire GST reloading exercise.

Fiscal hit much higher

The revenue secretary tried to underplay the fiscal impact of the GST concessions.

Taking 2023-2024 consumption data and applying new GST rates, he computed revenue implication (at pains not to call it revenue loss) of Rs 93,000 crore. Adjusting additional GST revenue of Rs 45,000 crore from sin goods and ‘ultra luxury’ goods subjected to 40% tax slab in place of 28%, the revenue secretary pegged net revenue implication/loss at Rs 48,000 crore.

This certainly is a gross under-estimation.

The 2023-2024 consumption-based revenue loss of Rs 93,000 crore, adjusted to 2025-2026 prices, is about Rs 1.10 trillion a year. The government would no longer receive GST compensation cess, which yielded about Rs 1.4 trillion a year. The 40% GST rate slab will reduce the hit by about Rs 50,000 crore a year.

Taking these elements together, the GST revenue loss will be about Rs 2 trillion a year.

Consumption boost is dicey

Consumption patterns inform that price reductions have no significant impact on the consumption of essential goods, but have a material impact on discretionary and durable assets consumption.

Trade is not counting a massive increase in the consumption of middle-class goods either. The chairman of Maruti expects growth in demand for cars to return to the 7-8% range. FMGC companies, which have been witnessing a nominal growth rate at less than nominal GDP growth, can expect to see it ramp up higher than nominal GDP growth.

Looked at another way, assuming all GST savings are passed on by the industry to consumers and they spent all of it in increasing consumption, the private consumption boost will equal a reduction in government consumption, caused by the fiscal loss.

It is a zero-sum game.

Political gain, fiscal pain

Like the Rs 1 trillion income tax bonanza given to the middle class in the 2025-2026 Budget (just before the Delhi elections), the GST Diwali gift (before the Bihar elections) may only amount to government trading fiscal pain for political gain.

Subhash Chandra Garg is former Finance & Economic Affairs Secretary, and author of ‘The Ten Trillion Dream Dented’, ‘Commentary on Budget 2025-2026’, and ‘We Also Make Policy’.