GST, tax reforms under Modi that could barely scratch the surface

Prime Minister Narendra Modi’s government, now in its third term, has completely overhauled the tax system, perhaps more than any other. From direct to indirect taxes, the government has made significant changes and more are on the cards, especially the GST – lower rates, a slashed number of slabs, and rationalisation of rate structures.

The Group of Ministers (GoM) on GST rate rationalisation agreed on August 21 to cut slabs to 5, 18, and 40 per cent (from the existing nine) – the first for merit goods and services, the second for standard items, and the third for sin/luxury goods. These changes would be recommended to the GST Council, usually held in the last week of September, for final approval.

Also read: GoM on rate-rationalisation accepts Centre's proposal of two-slab GST of 5, 18 pc

Repeat of 2017?

Ever since the prime minister announced an overhaul on August 15, optimism filled the air. The stock market is upbeat, despite the stiff US tariffs. Banks and other financial institutions predict a significant boost to consumption and growth, overriding the revenue loss that the change entails. There was similar optimism in 2017 as well when the GST was rolled out. In the run-up, then finance minister Arun Jaitley had said it could boost GDP growth by 1-1.5 per cent; experts agreed, predicting a 1.5 per cent boost to growth and a 2 per cent rise in tax-to-GDP ratio.

But the GST ended up as part of the “twin shock” that derailed growth (growth fell to 3.9 per cent in FY20, from 8.3 per cent in FY17), the other being demonetisation of 2016. The corrections being attempted now are the very design and implementation flaws that had been introduced back in 2017. But the GST alone didn’t produce the desired results; other major tax reforms also brought sub-optimal gains to the economy.

Here is a look at all those tax reforms:

New direct tax regime

The Centre introduced a new tax regime for corporates in September 2019 to induce private corporate capex, thereby boosting growth and creating quality jobs – the main concerns of the time. It slashed the base rate of corporation tax from 30 to 22 per cent for all existing domestic companies and from 18 per cent to 15 per cent for new manufacturing units – provided they didn’t claim exemptions. The revenue loss was estimated at Rs 1.45 lakh crore.

Also read: GST relief for health and life insurance premiums likely

But in FY24 (up to which data is available), private corporate capex was at 11.5 per cent of GDP – the same as FY15. This is despite additional subsidies for them, like the Prime Minister’s Rozgar Protsahan Yojana (PM-RPY) of 2018, Aatmanirbhar Bharat Rozgar Yojana (ABRY), and the PLI schemes of 2021. The RBI’s annual report of 2019-20 said, the tax cut was used by corporates to repay debts, build cash balance, and other current assets. Similar fate befell the RBI’s push for liquidity injection through the cuts in repo rate and CRR since the pandemic – sluggish domestic investment, even as profit-to-GDP rising to a 15-year high in FY24. Meanwhile, India Inc. is investing more abroad, attracting the ire of Chief Economic Advisor Anantha V Nageswaran who called it “a paradox”.

Perks for corporates

Soumya Ghosh, the SBI’s chief economist, writes the share of private promoters in capital market declined to eight-year low of 40.6 per cent on June 30, 2025, from over 45 per cent in December 2021, pointing out that “thus, part of the loss in promoter control due to deleveraging was regained though windfalls from tax cuts, and again liquidated through stake sale”. The new corporate tax regime hasn’t eliminated exemptions either. Latest budget documents say, larger companies with higher than Rs 500 crore profit before tax (PBT) continue to pay least effective tax at 19.7 per cent – which progressively goes up to 24.5 per cent for those with PBT of Rs 0-1 crore – highlighting that “the larger companies are availing the higher deductions and incentives or have shifted to the new regime of lower tax rate”. The budget documents show, revenue forgone to corporates is high – up from Rs 88,109 crore in FY23 to Rs 98,999.6 crore in FY24.

Also read: Downward GST revisions spark further revenue-cut fears in states

On the other hand, the new tax regime led to a massive fall in corporate tax collections and it lost its primacy. From an average of 33.8 per cent contribution to the Centre’s gross tax during FY12-FY19, it went down to 25.9 per cent during FY20-FY25. It even fell below personal income tax collection in FY21, FY23, FY24 and FY25, and is estimated to be so in FY26 (BE).

Poor private capex still a reality

None of it is a mystery. Tax cuts alone don’t lead to higher private capex. Domestic demands must rise to demand capacity additions for goods and services. Such is the state of manufacturing that its average ‘real’ growth of 6.1 per cent during FY15-FY25 is less than 6.2 per cent growth in GDP. And its GVA share has fallen from 16.3 per cent in FY15 to 13.9 per cent in FY25 (current prices) – farther down from the ‘Make in India’ goal of 25 per cent. Former CEA Arvind Subramanian and Josh Felman listed three factors to explain poor private capex: (a) ‘national champions’ model of growth vitiates level-playing field because it is business-friendly but not market-friendly (b) aggressive Income Tax and Enforcement Directorate operations against corporations and (c) India’s poor presence in global value chains due to tariff and non-tariff walls (more about it later).

Also read: Spotlight on prospective GST rate cuts pushes current sales into the dark

Threshold for personal I-T liabilities jump

A similar approach was adopted for personal income tax to boost demand and also to provide relief from the three economic shocks of demonetisation, GST, and the pandemic lockdown. Taxable limits were raised with and without exemptions. Starting in 2014, exemption limits went up from Rs 2.2 lakh to Rs 2.5 lakh in 2014, Rs 5 lakh in 2019, Rs 7 lakh in 2024, and Rs 12 lakh in 2025. That is, the monthly income of Rs 1 lakh is non-taxable.

With the standard deduction rising to Rs 75,000, tax exemptions go up to Rs 12.75 lakh per year. Unlike the corporation tax, personal income tax collection is going up, from 23.1 per cent in FY18 to 32.6 per cent of gross tax in FY18. But it has also meant that the actual tax base remains low – from 2.7 per cent of the population in FY20 to below 2 per cent during FY21-FY24 and 2 per cent in FY25 (up to December 31, 2024).

(To be continued)