Imagine a policy instrument that could cut grocery bills, reduce healthcare costs, and nudge the nation toward healthier living. And imagine it could also cool inflation while accelerating GDP growth. Seems impossible, doesn’t it? In its 56th Meeting, the GST Council has achieved exactly that, delivering what Prime Minister Narendra Modi aptly called “next-generation GST reforms”. They are forward-looking changes and not just tax adjustments, reflecting the maturity of India’s political economy through its collaborative spirit of cooperative federalism.
This harmonisation spirit embodied in the GST Council is a global innovation in federal tax coordination. It proves that in matters of citizen welfare, India’s democracy can rise above political differences and deliver extraordinary results through consensus. India’s institutional maturity and stability raise its standing among rating agencies and multilateral development institutions worldwide, providing a global model of tax jurisprudence and administration.
This transformation in indirect tax administration is a paradigm shift in India’s approach to economic governance. A complex four-tier tax maze has been replaced with an elegant two-rate structure, with a standard rate of 18 per cent and a merit rate of 5 per cent. A special de-merit rate of 40 per cent will apply on luxury and sin goods. The system is simple enough for a shopkeeper in Ludhiana to process, yet sophisticated enough to power a $5 trillion economy.
Boost to textiles, agriculture, healthcare
Ease of doing business is an important aspect in propelling India’s GDP growth and economic development. The reduction in GST rates from four slabs to two makes compliance easier. Registration of new firms is now processed in hours instead of weeks. Refunds are also processed much faster. These reforms reduce entry barriers for MSMEs and facilitate exports by improving cash flows for exporters and simplifying procedures for intermediaries.
Sectors such as textiles, agriculture, automobiles, and healthcare have received a major boost. The inverted duty structure, where raw materials attracted higher taxes than finished goods, has been removed from the textiles sector, benefitting everyone from cotton farmers to garment exporters. The change from 12 per cent GST on tractors, irrigation equipment, and agricultural machinery to 5 per cent strengthens the farm-to-plate value chain, potentially improving food security and nutrition access. Thirty-six lifesaving drugs, including cancer medications, are now completely exempt from GST. All other medicines and medical devices have been charged just 5 per cent GST. This isn’t just economic policy; it is an industrial strategy presented as a tax reform.
What about everyday items such as shampoo, toothpaste, and soap? GST has dropped from 18 or 12 per cent to 5 per cent. Health insurance is now completely exempt from GST. The bicycle for your child, utensils for your kitchen, and even cement to build your dream house, all of these have gotten significantly cheaper. UHT milk, pre-packaged paneer, and all Indian breads now attract zero tax. Reduction in GST on daily essentials directly translates into a drop in consumer price index (CPI), and food items constitute 46 per cent of the CPI basket. The money saved enhances purchasing power and flows back into the economy through increased consumption, creating a multiplier-effect virtuous cycle.
Also read: The problem with India’s exports isn’t just Trump tariff. It’s the PCI
Progressive taxation
The virtuous cycle is further maintained by designing progressivity within the naturally regressive indirect tax systems. The GST on small cars, three-wheelers, buses, and commercial vehicles has been reduced to 18 per cent, making public transportation affordable across the economic spectrum. Meanwhile, premium cars continue to face a higher GST, at a 40 per cent rate.
Beauty and wellness services and hotel accommodation under Rs 7,500 per night have been charged at 5 per cent, boosting domestic tourism. Yet, recreational spending by the wealthy in casinos and luxury sporting events has been charged a 40 per cent GST.
This demonstrates sophisticated fiscal management that balances reform ambitions with revenue stability, as it creates a natural economic stabiliser. During inflation, essential goods remain affordable for lower-income groups while luxury consumption automatically faces higher effective taxation, generating additional revenue for counter-cyclical fiscal policy. Despite GST being an indirect tax, these reforms ingeniously achieve progressive taxation principles.
The reforms also reveal the principles of behavioural economics embedded within tax policy through nudges. The rate rationalisation strategically promotes healthier consumption patterns. Natural honey enjoys preferential treatment over artificial variants, gently steering consumers toward healthier choices. Medical-grade oxygen remains tax-free, while industrial grades don’t, encouraging healthcare-focused production. Beyond tax relief, this is social engineering which uses market mechanisms to achieve public policy goals.
GST reforms prove that even indirect taxes can achieve progressive outcomes through thoughtful design and with taxpayers’ interests in mind. By simplifying compliance, reducing costs for essential goods, promoting health and nutrition, facilitating business operations, and using strategic behavioural nudges, these changes embody citizen-centric governance even as they strengthen economic foundations. India’s approach, balancing diverse interests while pursuing common prosperity, positions its GST system as a global benchmark for federal cooperation.
Avinash Pandey is an IRS officer currently with DGGI Ludhiana. His X handle is @avipandey_. Views are personal and do not reflect those of any organisation or the government.
(Edited by Prasanna Bachchhav)