Managing GST-2 not easy

The “one nation, one tax” dream is about to get a big shake-up. Prime Minister Narendra Modi’s Independence Day announcement of a revamped GST-2, with a bold new 40 percent slab, has set off expectations of cheaper goods and simpler compliance.
Like its predecessor, GST-2 risks becoming less about rationalization and more about revenue protection. The new GST structure proposes four slabs — 0percent, 5percent, 18percent and 40percent — scrapping the existing 12percent and 28percent categories for process simplification.
Finance Minister Nirmala Sitharaman professes that the new regime would mark the beginning of lower prices in consonance with the government’s move to keep inflation under check.
Merging the 28percent slab into 18percent will make items like air-conditioners, washing machines, dishwashers, and small cars cheaper. Tractors and some construction contracts may also move to the 5percent bracket, providing relief to farmers and infrastructure.
It is not clear whether stationery, packaging materials, footwear, apparels and daily-use goods taxed at 12percent would move to 18percent, raising costs for households and small businesses or 5 percent. Similarly, services like insurance, already burdened with 18percent GST, may find reprieve not easy though the government is keen on zero tax on health and life policies.
The rejig, the government wants to be revenue-neutral, but insiders admit the move is also designed to prevent a loss of up to Rs 80,000 crore annually, according to government estimates, if 12percent goods shift to 5percent.
That shortfall could be plugged by a punitive 40 percent slab on so-called “sin goods” and luxury consumption — tobacco, aerated soft drinks, pan masala, luxury cars, and online gaming.
The insurance realises Rs 9700 crore. There is a view that health and life insurance should be accorded major relief and be moved to zero tax or 5 percent. Either way the revenue loss would be heavy. The appropriate would be to tax the actual premium, a small sum, as agent commissions comprise 30 to-80 percent.
The states are not sanguine about the losses they would incur. In reality, many items could be put into the higher brackets due to the insistence of the states. West Bengal health minister Chandrima Bhattacharya, said after the GST Council meeting, “I raised in the meeting that if the states are going to lose the revenue… then we want to know how we are going to be compensated”.
She added, “We don’t know what is the revenue loss by this GST rate cut. They have not assessed yet.”
Uttar Pradesh finance minister Suresh Khanna says, “The presentation given by the Centre did not mention how much loss is being incurred.”
Winners and Losers
While prices of many items moving to the lowest slab would cheer up the consumers, it has a flipside too. Many goods that once were in 12 percent slab could now be more expensive. Consumers may soon feel the pinch on butter, ghee, packaged foods, processed fruits, jams, jellies, umbrellas, and packaging boxes. It can include students’ stationery as it is used for commercial and official use also.
The GST Council is likely to do many cosmetic adjustments. Sources indicated that the shortfall will be partly compensated by the highest 40 percent – the sin good slab. At present, these attract additional cess of up to 15 percent over the maximum slab of 28 percent, almost 43 percent.
Meanwhile, liquor remains outside GST, yet continues to get costlier due to cascading input taxes — an irony that GST-2 may have little to fix. The consumers bear the brunt of this increase in input taxes. As a result, the cost of beer and spirits went up.
This happens to many other packaged products as well.
A number of goods and services which had no tax were included in the list by the GST Council at its meeting on June 22, 2024, may be in anticipation of a rejig. It includes pens, recorded media production and print, broadcasting, sound recordings and licensing, printed material, packaging containers and boxes at 12 percent. It has increased the cost of many products as packaging materials are part of any product.
Now with the scrapping of the 12 percent slab, there is dilemma. Possibility remains of many being included in the 18 percent slab. Scrap and polyurethanes, which had no tax, were levied 5 percent tax. The bulk users get less benefit.
The Petrol Puzzle
Petrol and diesel, the country’s biggest revenue earners, are still outside GST. Both Centre and States resist their inclusion because of the heavy excise and VAT collections they fetch. Petrol remains a contentious issue since the implementation of the GST law. In the 53rd GST Council meeting press conference, Finance Minister Nirmala Sitharaman mentioned that it is the intent of the Central Government to bring petrol and diesel under GST, however it can be made a reality only once the states agree.
Hypothetically, if petrol were taxed even at 40percent under GST, prices could fall from Rs 96 to about Rs 78 per litre in Delhi or about Rs 20 anywhere— but such consumer relief seems politically unlikely.
Beyond rates, the compliance regime is still seen as complex. Business owners argue that every tax-filing businessman is treated with suspicion under GST, while procedural complexities make filing onerous. The GST-2 should address these structural irritants else simplification will remain a slogan.
Revenue First, Relief Later?
GST collections have been rising sharply — Rs 22.08 lakh crore in 2024–25, nearly double from 2020–21, a record 9.4 percent growth. In July 2025, the collections were a record Rs 195 crore, 7.6 percent annual rise.
With such buoyancy, taxpayers expected rationalization to mean lighter burdens. It has checked fiscal deficit. The GST-2 may turn into a revenue-protection exercise.
The 40 percent slab, presented as a narrow category for sin goods, may expand over time, roping in more items to plug shortfalls. Businesses are also keen on lower taxes to keep products internationally competitive with a need to boost exports under a tough Donald Trump regime.
The GST-2 is expected to mark a fresh chapter of simplification and relief. Instead, if it risks becoming a reshuffle of burdens, where cheaper goods remain a promise and the middle class continues to pay more, it would deviate from its goal. The real question: will the GST Council choose economic growth through rationalization, or stick to fiscal caution through high rates?