The Modi administration revealed sweeping changes in GST (Goods and Services Tax) rules on August 15, 2025, stating that a new GST model designed to ease tax compliances for common man, would be called “Next Generation GST”. But is this the real change in favor of the people, or a strategic gain in the government’s revenue scales? It’s this greater picture that I’d like to transform into a more realistic appraisal of just what these changes to GST would mean.
Understanding the Current GST System
What is GST?
GST is an indirect tax on the consumption of goods and services throughout India. When you buy anything like a chocolate, biscuits, soap, or a service, you pay GST to the seller, who in turn turns that tax over to the government. The system is an essential component of India’s tax structure and plays a vital role in generating revenue for the government.
Current GST Slabs in India
Currently, India operates with four primary GST slabs:
- 5% – Essential goods and services
- 12% – Standard rate items
- 18% – Most goods and services
- 28% – Luxury items and sin goods
Additionally, there was a proposal for a 32% slab, which has been shelved for now.
The Problem with Multiple GST Slabs
Real-World Compliance Challenges
Multiplicity of GST slabs is becoming a major challenge for brands. Here is a real case study : a manufacturer of mouth fresheners paying 12 per cent GST for four years who earns revenue of 10–12 crores. In 2021, he was informed that as he was using cocoa powder (the latter comes under the 18% slab), he should actually have been paying a GST of 18%. This resulted in:
- 6% additional GST liability for four years
- Heavy penalties and interest charges
- Severe financial distress for the business
Impact on Business Community
Multiple GST slabs create several problems:
- Compliance Burden: Businesses must constantly worry about correct classification
- Increased Corruption Risk: Complex regulations create opportunities for misuse
- Business Focus Diversion: Entrepreneurs spend time understanding tax rules instead of growing their business
- Economic Growth Impediment: When businesses struggle with compliance, overall economic growth suffers
International Comparison: GST Slabs Worldwide
Most developed nations maintain simpler GST structures:
- Japan: 1 tax slab
- Singapore: 1 tax slab
- Australia: 1 tax slab
- France: 2 tax slabs
- Canada: 2-3 tax slabs
- United Kingdom: 2 tax slabs
- Germany: 2 tax slabs
India’s four-slab system is more complex than most developed economies, indicating room for simplification.
GST Revenue: A Growing Cash Cow
Impressive Revenue Growth
GST has become a major revenue generator for the Indian government:
- 2021: ₹11 lakh crores
- 2025: ₹20 lakh crores
- Growth: Revenue doubled in just 5 years
Annual GST Collection Trends
Year-wise average monthly collections:
- 2025: ₹1.8 lakh crores
- 2024: ₹1.68 lakh crores
- 2022: ₹1.51 lakh crores
The government consistently achieves 10-15% annual growth in GST collections, driven by:
- Increased number of businesses
- Growing consumer spending
- Expansion of manufacturing sectors
- Better compliance mechanisms
The New GST Reform: Devil in the Details
Announced Changes
The government announced a transition from four slabs to apparently two slabs:
- 5% for essential goods
- 18% for standard goods
However, the reality is more complex – there’s actually a third slab at 40% for luxury goods that hasn’t received much attention.
The Real Picture: What’s Actually Happening
Items Moving from 12% to 5%
- 99% of items currently in the 12% slab will move to 5%
- This appears beneficial for consumers
- Represents only 5-6% of total GST revenue
Items Moving from 12% to 18%
- 1% of items will move from 12% to 18%
- Though small in percentage, these could be high-volume items
- Potential for increased revenue from these products
Items Moving from 28% to 40%
- 10% of items from the 28% slab will move to the new 40% slab
- Primarily luxury goods and sin goods like tobacco
- 90% of items from 28% slab will move to 18%
Revenue Impact Analysis
The 18% Slab: The Government’s Golden Goose
Here’s the crucial insight that most analyses miss:
Up to 75% of total GST revenue comes from the 18% tax slab alone.
This means if the government collects ₹100, approximately ₹75 comes from just one tax slab. Importantly, the 18% slab remains completely unchanged in this reform.
Revenue Distribution by Slabs
- 18% slab: 75% of total GST revenue (unchanged)
- 28% slab: 13-15% of total GST revenue
- 12% slab: Only 5-6% of total GST revenue
- 5% slab: Remaining revenue
The Strategic Move
By reducing taxes on items that contribute only 5-6% of revenue while keeping the 75% revenue-generating slab intact, the government appears to provide relief while maintaining its primary income source.
Economic Impact: Winners and Losers
Potential Benefits
- Reduced Compliance Burden: Fewer slabs mean easier classification
- Consumer Relief: Daily use items become cheaper
- Business Growth: Simplified system allows focus on core business
- Increased Consumption: Lower prices may boost demand
- GDP Growth: Estimated 0.6-0.7% potential GDP growth
Potential Concerns
- Revenue Loss: Approximately ₹500 crores in potential revenue loss
- Hidden Tax Increases: Some items may see effective tax increases
- Implementation Challenges: Classification issues may persist
- Limited Real Relief: Major revenue sources remain untouched
Sectoral Impact Analysis
FMCG and Packaged Food Industry
Before Reform: 5-12% GST on packaged foods After Reform: Mostly 5% GST
This change benefits:
- Food manufacturers
- Consumer goods companies
- End consumers through lower prices
Luxury Goods Sector
Before Reform: 28% GST After Reform:
- 90% items → 18% GST
- 10% items → 40% GST
Impact varies by specific product category.
Implementation Timeline and Process
Key Milestones
- August 15, 2025: Initial announcement
- Pre-Diwali 2025: Expected implementation
- GST Council Meeting: Final decisions on item classifications
Critical Decisions Pending
The GST Council meeting will determine:
- Exact items moving to different slabs
- Implementation timeline
- Transition mechanisms for businesses
Long-term Economic Implications
Positive Outcomes
- Simplified Business Environment: Easier compliance encourages entrepreneurship
- Increased Consumption: Lower taxes on essentials boost spending power
- Economic Growth: Stimulated demand drives overall growth
- Investment Attraction: Simplified tax structure attracts businesses
Potential Risks
- Revenue Shortfall: Government may need alternative revenue sources
- Implementation Glitches: Transition period may create confusion
- Sector-Specific Impacts: Some industries may face higher effective tax rates
Global Best Practices and Lessons
Successful Models
Countries with simpler GST structures typically show:
- Better compliance rates
- Reduced administrative costs
- Higher economic growth
- Lower corruption in tax administration
India’s Position
While this reform moves India closer to international best practices, the retention of three slabs (5%, 18%, 40%) still represents moderate complexity compared to single-slab systems in many developed nations.
Consumer Impact: Real-World Examples
Daily Use Items
For a ₹10,000 purchase of daily essentials:
- Before: ₹1,200 GST (12% rate)
- After: ₹500 GST (5% rate)
- Savings: ₹700 in consumer pocket
Business Operations
Manufacturers and traders benefit from:
- Reduced classification confusion
- Lower compliance costs
- Simplified tax planning
- Better cash flow management
Critical Analysis: Public Welfare vs Revenue Strategy
The Government’s Perspective
The reform aims to:
- Reduce tax burden on common citizens
- Make essential goods more affordable
- Simplify business compliance
- Promote ease of doing business
- Boost consumption and economic growth
The Skeptical View
Critics might argue:
- Primary revenue sources (18% slab) remain untouched
- Real relief is limited to low-revenue categories
- New 40% slab could offset revenue losses
- Overall government revenue may actually increase
Industry Expert Opinions
Economists recommend this reform, as a balanced move, actual relief on daily necessities but still keeping checks and balances in place. The key lies in implementation details and how businesses adapt to the new structure.
What This Means for Different Stakeholders
For Consumers
- Lower prices on daily essentials
- Simplified understanding of tax rates
- Potential for increased purchasing power
For Businesses
- Reduced compliance complexity
- Lower operational costs
- Better focus on core business activities
- Improved cash flow on essential goods
For the Government
- Maintained primary revenue sources
- Potential for increased consumption-driven tax collection
- Simplified administration
- Enhanced business sentiment
Future Outlook and Recommendations
Short-term Expectations
The immediate impact will likely include:
- Price reductions on daily essentials
- Increased consumer spending
- Business operational improvements
- Some sectoral adjustments
Long-term Implications
Over time, this reform could:
- Strengthen India’s manufacturing competitiveness
- Boost consumption-led economic growth
- Improve business environment rankings
- Potentially require further revenue optimization
Conclusion
The 2025 GST reforms are a major move towards a straight line of tax in India. Although the relaxations give some real relief on routine necessities and lower compliance overhead, the strategic retention of the biggest revenue earner – the 18% slab – does point to a well-planned step.
And whether this is real public benefit, or a shrewdly-designed tax plan in disguise, will depend very much on how it plays out in practice and upon what precisely is to be called what in each category. The acid test will be after Diwali when the reforms are totally operational and their on-ground implications are discernible.
The reform is an illustration of the government’s effort to juggle the public’s desire for tax reductions while being fiscally responsible. The advantages for consumers and businesses are very real and could be felt right away. For the economy, the lasting effects will hinge on how well all these changes actually jump-start growth and consumption.
While awaiting the final bylines from the GST Council, it is undisputed that this reform is a significant milestone in India’s indirect tax history paving way for greater simplification in the time to come.
