From complexity to clarity: GST Council ushers in a new era of tax reforms

The shift from four slabs to a leaner two-tier structure 5% for merit goods and 18% for standard goods, with 40% for sin and luxury items is the most far-reaching change since GST's inception

The government’s announcement of GST reforms at the 56th Council meeting — anchored around rate rationalisation, resolution of classification disputes, correction of inverted duty structures, structural changes, and trade facilitation —marks a bold reset of India’s indirect tax regime. By phasing out anomalies and aligning rates with economic priorities, the Council has revived the original promise of GST with renewed clarity and conviction. This next generation of reforms is poised to create a simpler, more transparent, and growth- oriented tax system. 

A defining feature of these reforms is the consensus-building that made them possible. Indirect taxation has always been a delicate matter of federal balance, but the Centre and states have walked in lockstep, demonstrating the spirit of cooperative federalism. Achieving unanimity on such sweeping changes speaks volumes about the maturity of India’s fiscal dialogue. Simplification, dispute reduction, and a broader tax base are central to this journey. 

Simplified rate structure,  broader relief 

The shift from four slabs to a leaner two-tier structure — 5 per cent for merit goods and 18 per cent for standard goods, with 40 per cent for sin and luxury items — is the most far-reaching change since GST’s inception. It reduces disputes, provides clarity, and supports investment decisions. The rate cuts offer visible relief. Food and FMCG items like dairy, packaged snacks, soaps, and toiletries now fall under 5 per cent, reducing household costs. Healthcare benefits with lifesaving drugs, diagnostic kits, and devices moved to 5 per cent or exempt. Aspirational goodssuch as small cars, two-wheelers, televisions, and dishwashers have moved from 28 per cent to 18 per cent, making them more affordable. Agriculture gains from lower rates on tractors, parts, and inputs, reducing costs for farmers and supporting rural demand. Construction benefits withcement at 18 per cent, cutting project costs and freeing capital. 

Structural reforms 

Beyond rates, the Council addressed bottlenecks. Recognition of intermediary services as exports enhances competitiveness and reduces litigation. Easier credit note adjustments, streamlined rules on discounts, and provisional refunds in inverted duty cases improve liquidity and ease of doing business. For products like cigarettes, pan masala, gutka, and chewing tobacco, an RSP-based levy has been introduced to curb evasion and safeguard revenues. This will apply only after outstanding GST compensation loans are repaid; until then, the current regime continues. 

Trade facilitation measures 

Reforms also target compliance simplification. A new automated registration system promises approval within three days for low-risk applicants, covering nearly 96 per cent of cases. Refunds will follow a risk-based process, with 90 per cent of eligible claims released provisionally upfront, including inverted duty refunds. These measures particularly aid MSMEs by easing working capital stress, lowering entry barriers, and enabling smoother integration into the formal economy. 

Handling transition 

Businesses must assess the impact of rate rationalisation on costs, exemptions, and input credits. Cash flow implications — especially for capital-intensive sectors — must be managed, alongside incentive structures and distribution arrangements to ensure rate benefits reach consumers transparently. Contractual terms also need review, as cost or pricing changes could affect outcomes. 

Another concern is the phased withdrawal of compensation cess for sectors like automobiles, coal, and aerated beverages. Without timely clarity, cess accumulation could dilute the benefits of rationalisation. 

Future outlook 

Additional reforms — such as integrating the real estate sector into the GST framework, pruning blocked credits, unifying audit procedures, and decriminalising GST— could be considered to boost competitiveness and certainty. India’s next-gen GST reforms are not just fiscal adjustments but a transformative leap in tax architecture. They will accelerate formalisation, energise consumption, reduce disputes, strengthen competitiveness, and align with India’s aspirations.

 

The authors, respectively are  national tax leader, EY India and  indirect tax leader, EY India. Views are personal.