One clear benefit, four open questions: GST reform delivers a win for consumers but at what cost?

How should we assess the GST reforms? There is one unambiguous benefit and four open questions:

Unambiguous benefit
GoI has taken a big step toward a simpler rate structure by eliminating the 28% and 12% slabs, and folding cesses on some goods into a 'sin' rate of 40%. It has also taken a major step towards tax fairness. There was never any rationale for imposing a 28% rate on middle-class items such as white goods or on cement, as one of us (Subramanian) had argued when the GST was originally being designed. Reducing this rate to 18% will surely gain the government enormous credit. Nirmala Sitharaman has probably cemented her legacy as one of the most tax-cutting FMs in Indian history.

Will it revive the economy?
The tax cut will certainly spur the economy. Precisely how much depends on the magnitude of the cut, about which there is some confusion (see chart), the degree to which it's passed on to consumers, and the extent to which consumers spend the gain, rather than save. But whatever the magnitude, it will surely be modest compared to the size of India's $4 tn economy.

The more important question is whether GST's simplification will boost long-run growth. Here, one has to be sceptical. For a start, the system will remain incredibly complex, with many more rates than is generally realised. In particular, problems like value-based, end-based and input-based GST rates will persist. In addition, removal of input tax credit (ITC) from goods such as healthcare products and insurance is a retrograde step, reintroducing the problem of cascading taxes that plagued the previous excise tax system.

More to the point, mere GST reform will do little to solve the fundamental problems of the Indian economy: risks of doing business in India and Trump tariffs, which have undermined private investment, domestic and foreign. Unless these problems are addressed by improving policy stability, transparency and rule of law - reducing harassment by central and state tax authorities, levelling the business playing field, and abandoning arbitrary import and export controls - the long-run growth consequences will be negligible.

Will it undermine the long-run fiscal situation?
Reportedly, the tax cut (reduction in the overall kitty, including cess) is around ₹93,000 cr. But this figure appears to cover just the six months remaining in FY26. So, we attempted our own exercise, adjusting collections from each item by the planned change in tax rates. The exercise confirmed this hypothesis, producing an annual figure between ₹1.5 lakh cr and ₹2.1 lakh cr, roughly consistent with the oft-cited figure. (The range reflects assumptions about what eventually happens to cesses on 'sin' goods, tax compliance and the extent to which households respond to the tax cuts by increasing their purchases.)

Fiscal implications of such a sizeable tax cut are worrisome. The accompanying chart shows that around 6.2% of GDP used to be collected from the taxes that were subsumed in GST. Next year, GST revenues are likely to fall to just 5.3-5.5% of GDP, representing a cumulative revenue loss of 0.7-0.9 percentage points of GDP. This loss could have serious consequences for long-run macroeconomic and fiscal stability.

Will states be adversely affected?
This depends on the benchmark. After cuts, states might receive about 2½% of GDP, about the same as the current situation, because the tax cuts will be offset by the folding of cesses (from which states are not benefiting, as cess revenues are being used to repay debt incurred during Covid) into the GST system (from which they will receive revenue). But compared to the pre-GST tax ratio, states will take a sizeable revenue hit.

Some states are consequently aggrieved. They argue that they gave up sovereignty over indirect taxes only because they were told they'd collect more revenue under GST. And now that there is a revenue shortfall, they are poorly positioned to absorb it, since they have few remaining tax levers.

All of which leads to our final question.

Were the reforms consistent with the spirit of cooperative federalism?
India was able to pull off GST because of the stewardship of Arun Jaitley, who wanted to take the states with him, and offered a generous (some would argue overly generous) 14% revenue guarantee to reassure the reluctant states.

At first blush, the federalist spirit might seem alive, since the GST Council passed the latest reform unanimously. But doubts linger. The reform announcement was made at the Red Fort, not in the GST Council. And many states responded by expressing deep anxieties. So, was this reform truly the result of consultation, or did the Centre use its political majority to force the issue ahead of critical elections?

A larger conclusion is that the Indian polity loves not just expenditure largesse but also tax cuts. Indeed, the entire history of GST has been of one-way movements in tax rates: downwards. As a result, the effective GST tax rate will fall to just 10.5% once the latest cuts take effect, a far cry from the initial 15.5%.

As the country celebrates the Diwali-Navaratri GST cuts, it must also confront their implications for building long-term macroeconomic and fiscal resilience.