From 2017 rollout to latest rejig, GST remains repair-in-progress

Trust a top-down rejig in the complex-by-design GST regime to produce as many new problems as it solves.

The GST Council has approved tax cuts on 391 goods (including the elimination of 18 per cent tax on 20 goods), but it simultaneously raises tax on several services – the full impact of which will unravel over the next few weeks.

Watch | GST 2.0: Historic reform or delayed fix? Political, economic angles decoded

Since the production of goods and services is intertwined, the net impact would be undermining the benefits envisaged, including from corrections in inverted duty structures (IDS) in sectors like agriculture (except for tractors, as steel continues to attract 18 per cent), fertilisers, textiles, etc.

GST on many services up

The services that attract higher GST include work contracts and transport, impacting the cost of a large spectrum of goods being produced. Work services range from earth work to oil and gas exploration (up from 12 per cent to 18 per cent).

Transport services attracting higher GST range from air transport to a few categories of transport involving motor vehicles, railways, transport agencies — transporting natural gas, petroleum crude, motor spirit, high-speed diesel — and multimodal transport of goods within India, renting of motor vehicles, etc (12 to 18 per cent).

Local delivery services now attract 18 per cent tax — from nil earlier — through e-commerce operators (ECOs) like ride-hailing Uber and food-delivery ones like Zomato, Swiggy and Zepto. These platform services are now seeking to pass on the burden to ‘independent’ drivers and delivery ‘partners’, further weakening the consumption capacity of millions of gig workers engaged by these operators. The platforms are arguing that they merely connect the gig workers with consumers.

The other services for which the GST has been hiked from 12 per cent to 18 per cent are professional, technical and business services, such as exploration, mining, drilling of petroleum crude, and natural gas. Together with work services, this will raise transport costs and costs for goods manufactured using petroleum, petroleum products and natural gas.

Complexity clouds gains

In a few services, the GST has been lowered (involving bricks, pharmaceuticals, leather, beauty products, etc.) or eliminated (life and health insurance).

While the first is a relief, the second disables the insurance sector from absorbing the rise in input costs because it can no longer avail input tax credit (ITC) and may have to raise premiums or limit passing on the benefit that arises from the elimination of the GST.

Also read | GST 2.0: Why zero tax may not mean cheaper insurance

Such is the complexity of the GST in services that, though only 15 services are listed, there are multiple slabs in most cases – some going up, some down and some unchanged. In all, in 13 cases, the rates go down, but in 12, the rates go up, in one, remains unchanged, while two are exempted (insurance).

Another problem is fire-fighting to contain the fallouts of withdrawing GST compensation cess (from all except tobacco products) and unutilised ITC due to the lowering of the GST on the final products.

Transition pangs

The auto sector, for example, is worried about the GST cess the dealers have already paid manufacturers (OEMs) while taking deliveries, before and after August 15, when the Prime Minister announced the “next gen” reforms without prior consultation with industry or state governments. The auto dealers’ association claims to have paid Rs 2,500 crore of the 1-22 per cent cess over the GST. The question is how they would recover the money.

Similar questions arise for many sectors in which IDS has been corrected – taxes on inputs lowered to match final products – like agriculture, fertilizer, textile and also the insurance sector, for which the GST has been eliminated altogether. Companies have already paid higher input taxes but may not recover those fully as the taxes on the final products they sell remain unchanged (and lower), and in the case of the insurance sector, none at all.

These sectors need to be refunded the excess tax or adjusted against their tax dues. Both require amendment in the GST law. So, the GST Council may need to meet again to approve the amendments and the process of offsetting the excess tax.

No wonder Cabinet Secretary TV Somanathan is reported to have called an inter-ministerial meeting on Monday to prepare the ground for such amendments.

Multiplicity, special rates endure

Then there are other repair works to make GST a true “one-nation-one-(indirect) tax” regime.

While briefing on the rejig on September 3, Revenue Secretary Arvind Srivastava said many of the “special rates” continued. These were not spelled out, not even in the final statement that was released – except one. “Natural cut and polished diamonds up to 25 cents (1/4 carats) imported under the Diamond Imprest Authorisation Scheme” attract zero GST, from 18 per cent earlier.

Also read | How Centre has bullied states over GST compensation over the years

Former Chief Economic Advisor (CEA) Arvind Subramanian and his colleagues Abhishek Anand, Varun Balotia, Praveen Ravi and Navneeraj Sharma had listed these special rates ahead of the GST Council meet on September 3, 2025: 0.1 per cent for imitation jewellery, 0.25 per cent for precious stones, 1 per cent (without ITC) for below Rs 45 lakh housing, 1.5 per cent for affordable housing, 3 per cent for precious metals/jewellery (including gold), 7.5 per cent for non-affordable housing etc.

These are other than the four main rates of 5, 18 and 40 per cent for goods and services and 40 per cent with GST cess on tobacco that the Centre has publicly announced and released.

More fiscal worries

After the rejig, Subramanian, along with Abhishek Anand and Josh Felman, wrote on September 7: “…the system will remain incredibly complex, with many more rates than generally realised. In particular, problems like value-based, end-based and input-based GST rates will persist.”

In their assessment of the post-GST rejig, Subramanian and his colleagues also disputed the revenue loss estimates of the Centre: Rs 48,000 crore. Their own assessment is a revenue loss of Rs 93,000 crore for the remaining six months of FY26 and annually Rs 1.5-2.1 lakh crore. This is a massive loss, half of which would be borne by state governments.

If right, this loss would have a massive fiscal implication for both the Centre and states, which they would have to manage either (a) by cutting down government capex and revenue expenditure, which will slow down growth, or (b) borrow from the market, which will raise fiscal deficits.

Both spell trouble for the economy.

Critical exclusions

The rejig didn’t even attempt to address the exclusion of four key sectors. Two of the biggest money spinners in the Indian economy remain out of the GST ambit: Petroleum and petroleum products, and alcohol for human consumption.

Real estate, another money spinner, is out of GST (sale of land and building), except for some transactions. The same is true for electricity.

Since Finance Minister Nirmala Sitharaman said inclusion of the excluded sectors was not on the agenda of the GST Council (despite eight years of their exclusion), there is no reason to believe these would be subsumed any time soon to make the GST “one-nation-one-(indirect) tax” – as it was envisaged and sold at the time.

Why so complex?

The GST’s complexity emanates from its very design.

A former finance ministry official who witnessed the events unfolding in 2017 says the design flaws came in as the Centre was in an extraordinary hurry to roll out the GST and showcase it as a mega reform, after the mega economic shock of the demonetisation in 2016.

Also read | Will the GST rejig revive consumption and boost growth?

The hurry meant, the former official said, the Centre compromised on the design of a “good and simple tax” it was meant to be and allowed states to protect their individual interests, industry groups and monopoly businesses did their bits to skew the tax structure (inverted duty structures, illogical and multiplicity of slabs).

Subramanian and his colleagues had listed 45 GST rates in their article of September 2, 2025, mentioned earlier. Once the final picture on rejig emerges, the number may have gone down substantially, but there would still be a dozen or more rates.

Pushed through in haste

To make the matter worse, the flawed-by-design GST was rolled out with equally complex and compliance-heavy implementation mechanisms (multiple forms to be filled monthly, quarterly and annually to both the central and state governments).

Nonetheless, it was showcased as the second freedom for India, with a midnight session of the Parliament to resemble the one held to mark India’s independence in 1947.

The latest rejig, too, is showcased similarly.

Watch | Why Arvind Subramanian thinks GST 2.0 won’t fix deep structural risks

The Prime Minister described it as the “biggest reform of Independent India” at a public event on September 4.

He had announced this rejig from the Red Fort on August 15, 2025, without consulting states or industry. This forced the Centre to rush through its rejig too – first through a GoM on the GST, which met on August 20-21 and approved the Centre’s proposals. This was followed by the GST Council’s meeting on September 3-4, but ended on the first day itself.

Why the extraordinary haste?

It was the penalty tariff of 25 per cent that the US announced on August 6, over and above the 25 per cent “reciprocal” tariff announced on July 30, which rattled the Centre. It sought to soften the impact by boosting consumption through the tax cut, ahead of the festival season.

The US tariff had sent shock waves across the country. The rupee fell, stock markets tanked, and FPIs intensified their flight. The Finance Minister may have denied the link but she had done so earlier too – after she cut tariff on 30 items in her February 2025 budget which were aimed at softening the US and prevent the threat of “reciprocal tariff” and followed it by withdrawing 6 per cent equalisation tariff (popularly called Google Tax) to benefit the US tech giants like Google, Meta and Amazon.

Also read | GST 2.0: Will 2 slabs simplify India's tax maze? | Talking Sense with Srini

In contrast, Chief Economic Advisor Anantha V Nageswaran told a foreign news agency on September 8 that the US tariff could shrink the GDP by up to 0.6% and the GST rejig could raise it by up to 0.3 per cent – which would leave half the damage uncovered.

Not the last rejig

Sure, this isn’t the last rejig in the GST, nor a comprehensive one either.

A Finance Ministry official told a national daily a few days ago that the impacts of the three big previous rate cuts – in November 2017, July 2018 and June 2022 – were “piecemeal” and the benefits were not passed on to consumers in a significant way, underlining the need for a “holistic” reform.