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The GST rationalisation carried out by the Modi government is a major fiscal and distributional reform. The landmark GST reforms announced by the GST Council and Ministry of Finance, effective from 22 September 2025, introduced significant structural changes in the tax framework. By collapsing several tax slabs into a simpler structure focused on 5 percent and 18 percent rates (with targeted nil and higher de-merit rates), the reform reduces the tax burden on hundreds of everyday goods and key production inputs, while directing higher rates to luxury and sin goods. The measures are explicitly aimed at easing the cost burden on households, stimulating consumption, correcting inverted duty structures that harm domestic manufacturing and exports and simplifying compliance.
One of the major steps was the consolidation of slabs, with most common goods and many services shifting from the 12 percent or 18 percent bracket to 5 percent. Essential food items and daily-use FMCG products were placed under much lower rates and some items even became nil-rated, such as basic breads and certain packaged dairy products.
Another important move was the reduction in tax rates for several consumer durables and mobility categories. Goods that earlier attracted 28 percent GST, including select air conditioners, televisions up to 32 inches, dishwashers, small cars and motorcycles up to 350 cc, were brought down to 18 percent. Tractors and agricultural machinery were also given lower rates to promote farm mechanisation and rural productivity.
The reform further addressed the long-pending issue of inverted duty structures. Inputs like manmade fibre and yarn were moved to lower rates, improving
By lowering rates on essential items, the government has taken an explicit welfare-driven step that eases the consumption tax burden on lower- and middle-income households
competitiveness and boosting export prospects in the textile sector. Handicrafts and cultural goods also received relief through reduced rates, extending protection and support to artisans and traditional industries.
Together, these measures reduce consumer prices at the source when benefits are passed on and remove distortions that had previously discouraged domestic value addition and manufacturing.
A Policy Milestone
The GST reform represents a major distributional tilt in favour of households and small consumers. By lowering rates on essential items, the government has taken an explicit welfare-driven step that eases the consumption tax burden on lower- and middle-income households. This design directly translates into lower retail prices for frequently purchased items, giving citizens tangible relief in their day-to-day lives.
Equally important is the administrative simplification that comes with a streamlined slab structure. By reducing classification disputes and compliance complexities, the reform lowers costs for businesses while improving invoice-level accuracy and e-filing efficiency. Industry chambers have already signalled that this simplification will reduce compliance friction and support long-term revenue stability.
The reform also carries a strong strategic industrial policy dimension. Correcting inverted duty structures in textiles, handicrafts, fertilizers and agricultural machinery ensures that tax policy is better aligned with national objectives such as export competitiveness, rural livelihoods and farm productivity. These targeted corrections strengthen key sectors of the economy and protect vulnerable segments like artisans.
The reform has a visible political economy impact. Its redistributive nature is easily observable at the point of sale, making it a flagship policy achievement that resonates with the public. By lowering everyday costs and boosting demand across sectors, the reform not only enhances citizens’ welfare but also reinforces the government’s credibility in driving macroeconomic growth.
Short to Medium Term Economic Effects, Evidence and Estimates
The GST rate cuts are widely expected to provide a consumption boost and lift GDP growth in the coming quarters. Several analysts and industry economists have projected that the reform will stimulate demand, with early estimates by bank economists suggesting positive effects in the second half of the fiscal year and into FY27. Lower GST rates would improve operational efficiency and expand the formal market, thereby adding to growth momentum.
The extent of the real consumption boost, however, depends on the pass-through of tax reductions to consumers. Many automakers and consumer goods companies have already announced that they will pass on the benefits. Media reports confirm that some firms have revised sticker prices for vehicles and two-wheelers, signalling that the reform is translating into tangible price relief for consumers.
Sectoral demand signals are also emerging. Tyre manufacturers and tractor component suppliers, for instance, anticipate higher volumes. CEAT, a leading tyre firm, has projected demand growth in tractor and entry-level motorcycle tyres, which is an early indication of rising rural and mass-market demand following the tax cuts.
At the same time, fiscal trade-offs must be acknowledged. Independent research and tax advisory analyses estimate a potential revenue loss ranging between Rs 70,000 crore and Rs 1.8 lakh crore annually. The ultimate impact will depend on factors such as consumption elasticity, expansion of the formal base through compliance gains and the effectiveness of state compensation mechanisms. This revenue dimension is crucial for maintaining centre-state fiscal balance and framing medium-term budgets.
Sectoral Welfare and Benefit Analysis
The GST rationalisation carries important welfare implications for fast-moving consumer goods, household items and food. Lower taxes on soaps, shampoos, toothpaste, packaged snacks, staples and selected dairy products reduce the everyday expenditure basket for consumers. This has a progressive effect since lower-income households spend a larger share of their income on these goods, meaning their real purchasing power rises. In the short term, the policy is expected to boost sales volumes and ease margins for informal retailers, while in the medium term it may contribute to improved nutrition and hygiene outcomes if price reductions are sustained.
In the automobile and two-wheeler sector, the reduction of some items from 28 percent to 18 percent, along with cuts for motorcycles up to 350 cc, lowers both entry and replacement costs for mobility. This improves affordability for first-time buyers, rural commuters and small-scale transport operators, thereby enhancing labour market mobility. Industry reactions already suggest near-term price corrections and volume gains, although risks remain that supply chain constraints could dampen the full benefit if demand spikes too quickly.
For agriculture, tractors and farm machinery, lower GST directly reduces input costs for farmers and encourages mechanisation. The welfare impact is evident in higher farm productivity, lower physical drudgery and better rural incomes through wider adoption of equipment. This, in turn, generates multiplier effects for the rural economy. Manufacturers and suppliers, including CEAT, have already anticipated demand growth for tractor tyres, signalling stronger rural demand.
The textile sector, along with manmade fibres and handicrafts, benefits from the correction of inverted duty structures that had previously raised input costs. By reducing taxes on inputs and lowering rates for handicrafts, the reform strengthens domestic value chains, improves export competitiveness and supports the livelihoods of artisans. This can lead to better margins for MSMEs and potential employment growth in labour-intensive segments.
Health and essential services also see positive effects, with lower rates on certain medical goods, health-related items and packaged staples. These changes improve affordability and provide small but meaningful real income gains for poorer households, aligning with broader welfare and inclusion objectives.
Long-term structural benefits
Simplified rates reduce classification arbitrage and may raise compliance, expanding the taxable base over time. Greater formalisation could offset part of the immediate revenue loss. Removing inverted duties and lowering input taxes supports manufacturing competitiveness, particularly textiles and processed foods, improving export prospects over the medium term. Persistent lower prices for staples and household goods act as a recurring transfer to poor households, improving real incomes and consumption smoothing, which in turn supports human development indicators. Rising consumption in durable and semi-durable goods may induce firms to invest in capacity, creating employment and productivity gains that compound over multiple years. Analyst commentary highlights the potential for a growth uptick in FY27.
The 2025 GST rationalisation is a landmark policy that combines visible welfare gains for households with longer-term industrial and competitiveness benefits. The tradeoff between immediate revenue impact and sustained growth will be resolved by the quality of implementation and by the extent to which the formalisation dividend materialises. Early industry responses and official documentation indicate both positive outcomes and legitimate fiscal questions that policymakers must manage prudently.
This bold step reflects the Modi government’s determination to balance welfare with growth, simplicity with efficiency and consumption with competitiveness. By cutting taxes on essentials while correcting structural distortions in industry, the reform delivers relief to millions of families and gives Indian enterprises a sharper edge in global markets. It is a decisive signal that fiscal policy under Prime Minister Modi is not just about revenue collection but about empowering citizens, encouraging industry and strengthening India’s long-term development trajectory.
(The writer is MP, Rajya Sabha & National General Secretary, BJP)