GST reforms: Taxation can't be an emotional decision, says FM Sitharaman

Days after the big-bang GST reform announcement, FM Nirmala Sitharaman, at her North Block office on Saturday, spoke at length on a range of issues in an hourlong interaction with Business Standard

What was the economic policy vision behind the big-bang reform? It is coming after the income-tax law changes… So, how do you situate this GST initiative in the larger economic context, both in terms of policy as well as the state of the economy?

 

GST has completed eight years. In the course of those eight years, there were several lessons learnt. Unfortunately, Covid came in between. So, lessons which could have been learnt within four to five years could not happen because of Covid. One or two years after that were taken to restore normalcy. So without the two to three years of Covid-affected period, we have revamped GST within five years of its introduction. We have not timed it for the (US) tariff, we have not timed it for anything…. An Income Tax Act in this country has existed from 1961 till 2025…. So, it is not as if it has come too late.

 

 

Are you surprised by states’ response? There was virtually a quiet acceptance barring a few noises.

 

I was very happy. I came out and immediately recognised it. And let me tell you, I have written a personalised letter to each one of the finance ministers. I wrote with a great sense of appreciation that all of us together have risen to the occasion. People of India deserve this. We have deliberated, we have had differences but we have all stood together to say: Yes, this should happen, and therefore, I am very thankful.

 

Because this decision has been taken by consensus, not by voting…

 

Yes. In between, I did say I should put it to vote or else, we could have a discussion also. There was no difference on the rate change proposed by the Union. We are in support of the proposal which is pro-people, pro-middle class, pro-MSME, pro-the large interest of the economy to grow faster. There was no opposition against that. If anything, the concern was what happens if my revenue goes down, state's revenue goes down. So the proposal was not opposed ever.

 

With the GST rate cuts and income-tax relief before that, are there any early assessments of demand, GDP and inflation impact?

 

The finance ministry has not put out anything. It will be too early for us to give you an estimate.

 

What was the trigger point or defining moment when the government thought that GST should be changed and it should be simplified?

 

There was no defining moment or trigger point. It was like the way we handled IBC (Insolvency and Bankruptcy Code)… In IBC, we brought in three to four amendments because we wanted to keep it robust and relevant to the needs of industry. Here, the relevance and need is that the people should get a simplified rate of tax which is friendly. Above all, the structure has to become absolutely simple to understand, compliance has to become simple to understand. Those were the reasons with which we have made the changes. There are no trigger points in such things. Reform has to be a continuous process and I will not wait for decades to get reform done. If it is within two years, we will do it. 

Union Finance Minister Nirmala Sitharaman. (Photo: Finance Ministry)

 

This government has championed supply-side measures. The corporation tax cut in 2019 was a big example. But since then, the income-tax cut was a demand-side measure and then the GST rate rationalisation now…. Is that a conscious shift to boost the economy?

 

A government cannot afford to do demand side measures once, and after a few years, supply side measures. They have to be balanced even as we are going along. It's a continuous balancing act, and there is no shying away from balancing. It's not as if I can go to one extreme this side, and after a few years, come back. It's like the market equilibrium. It has to be continuously kept afloat.

 

Most of industry has welcomed the GST revamp, and companies have said they will be passing on the benefits. But many are flagging transition issues, whether it’s-fast moving consumer goods (FMCG) or cars.  Some are even asking the government to defer the September 22 rollout. Your views?

 

I don’t know where that is coming from. At least people who are speaking to us are more than willing to go on. This morning (Saturday), you had Mahindra saying they would do it now. So transition problem is not there for them. How are they doing it? Tata Motors said they would happily do it from 22nd. How? We are putting out the FAQs on how we treat it, and in fact, let me take this opportunity to pat my back for a moment. Tell me one finance minister, who after any press conference, after a dream budget, has put out a 70-page press note. We are clear about what we are doing.

 

There is a sense that insurance companies won’t get input tax credit (ITC) because of the zero levy. So is a zero rating of their product a solution?

 

We have thought through all this. So if I have given a waiver for some categories, we have left the others wherever they were… like group insurance. Government takes a conscious call after talking with the stakeholders. There are some sectors who would want it with input credit. And there are others who don't want any of the input credit. Industry knows where it wants to position itself. So we give them both the options. The end result should be that people get the benefit. Yes, we don't want industry to be totally disrupted…. decisions are taken with their consent. And when public-sector insurance companies can come out and say they will pass it on, why can't others do it?

 

So there is no review on that score. Right?

 

No. Because ultimately, they are all working in a free market situation. I am not interfering in any company’s activity. Boards are driving them. You take a call.

 

Do you expect the GST rate rationalisation move to be a stimulus for corporate India? And do you think this will help them invest more?

 

I think it’s a very clear step forward when the government has cut the rate. And that is going to have an impact on literally every one, whether you buy a toothpaste, a safety pin, a car, shoes or medicines or you go to a diagnostic centre. With this rate rationalisation, everyone is going to have that relief. That itself will trigger consumption. Demand will increase. And if demand increases, what will the industry wait for? …. Once the investment comes, capacity will be built and jobs will be created. So this GST reform is a classic example of that virtuous cycle. It is being kicked in now.

 

How much time do you think it will take for India Inc to respond?

 

I wouldn’t be able to guess.

 

The Central Board of Indirect Taxes and Customs (CBIC) chairman said in an interview to Business Standard that sin goods (demerit goods) would face an extra levy on top of the 40 per cent GST rate. In what manner can this levy come? 

At this stage, I won't be able to say anything. We’ll have to work on it. There's some work going on. I’ll have to see how well we'll fashion it out.

 

Will you share that revenue with states?

 

I don’t know about it yet.

 

Many experts are saying the revenue forgone or loss will be around ₹1.5 trillion to ₹2 trillion, whereas the finance ministry’s estimate is around ₹48,000 crore (₹0.48 trillion). So do you think it can go above your estimate? 

 

We have given a number. And that's the number we think will be the case of revenue coming down in the immediate future. But with demand and consumption going up, it will be made up or offset immediately, I would think. The offsetting will start immediately during the festive season itself. And to a large extent, the number that we've shown and said in the Council, offsetting will happen this year itself.

 

You have also banned online real-money gaming, which was a big source of revenue. So have you factored that in also in this ₹48,000 crore maths, or will that be above that?

 

Online gaming is not banned in total. We have banned playing with money. So GST having a category for online games is relevant.

 

But will that be a major source of revenue loss?

 

We don’t know. We will have to see.      

 

You have said that you’ll be monitoring passing on of the rate rationalisation after September 22. In the absence of an anti-profiteering body, is there an institutional mechanism to track this compliance?

 

Look at the anti-profiteering record. There were not even 300 (big) cases, right? With or without a mechanism, the idea is that you have to keep an eye. You have to act if it is not getting passed on. That's what we’ll be doing here.

 

Can you explain a bit on the monitoring drive and how it will work?

 

I am doing the drive now in making sure that people pass this on. So the drive is not with distrust. The drive is just in case. Just in case it doesn’t get passed on, I am here. So it's not as if I disbelieve or mistrust the industry. So my approach is one of trust with industry or trade. And that's why they are already giving statements. We are talking to them, telling them to pass it on. The intention is good. We want people to benefit. And if we are saying Viksit Bharat 2047, not much time is there. People should come out, economy should be buoyant, robustness should be there, industry should invest. Without doing all this, we can’t aim to reach in another 20 years the level of development which is such an aspirational point for people. So I start with the point of trust that industry will pass on the benefits. So I can't really say that on September 22, I will be sitting with a stick. 

 

Trade-related uncertainty is the biggest risk to growth everywhere. And one is already seeing some adverse impact on employment. So what is the government’s plan?

 

On the (US) tariff front, different departments are talking with their respective stakeholders. I'm not sure the industry has arrived at a number yet of what is going to be the impact of that 50 per cent tariff for the exports going to the US. An exporter doesn't set up a business saying I'm exporting only to the US. He sets up a business to export. A percentage of his export goes to the US, and it is that which is getting hit by 50 per cent. So how is he going to be actually hit? How much, what is the extent to which he will be hit, are assessments which he has to make, which that industry will have to make. Each industry will have to make for its own. And unless the industry tells its concerned ministry or department about the hit, the government cannot work out anything meaningful. After all, the tariff came into effect on August 27. We will have to get a figure and see.

 

Will the package that the government is working on come out soon?

 

Once these inputs (from industry) come.

 

You are now saying that even for the inverted duty structure, 90 per cent of the entire refunds will happen automatically. Do you have any game plan that the rest 10 per cent will also be refunded at some point in time?  

 

No. At the moment, we are confident that this 90 per cent is done on the assumption that the majority of them are compliant. And there are only a few black sheep who game the system. We don't want that sense of caution to affect everybody else's efficiency. We said we’ll give 90 per cent, and see for the rest. I would hold that 10 per cent a bit longer to make sure that I am not going to rush into something, and later, having to retract.

 

You have kicked off the GST appellate structure. Will it be a countrywide institution or will it start with some states, as it started with the IBC?

 

No, every state has minimum one or two tribunals even now as we begin, and the appellate authority will be in Delhi. Every state has decided on its own where they want it. We have not interfered in the process. The group of officers who are working on execution, jurisdictional, case value, and so on, will submit the report in another 10 days, By the end of this month is when the rules and the operational guidelines will be in place. The process will start off from October 1, but hearings will happen by November because there’s so much of paperwork in between.

 

You have introduced faceless assessment in income tax. In GST, it is largely online, but the human face comes in. Is there a timeline you have in mind to make it faceless?

 

Ideally, it should become faceless, but I would wait for some time until everything settles down, particularly after this major decision. Then, of course, we’ll take everybody on board and decide how to do this because there is a State GST (SGST) component, a Central GST (CGST) component, and an Integrated GST (IGST) component. Faceless will mean in all three cases, participation of both the states and the Centre in the faceless process. I want a stable, stabilised GST first…

 

The revenue secretary has said this exercise will be fiscally sustainable. But do the rising bond yields worry you in terms of government borrowing?

 

This is separate. Yes, I think this is perfectly sustainable, and this will be suitable for manufacturers, retailers, wholesalers and the consumers. And absolutely smooth flowing … See, the inversion problem is the one which caused a lot of bitterness within the GST… Because of the pressure of some section of industry, we changed it at the end user rate, and in some cases, we changed it in the procuring itself, raw material procurement, manufacturing, then going to the wholesaler and then….  That is the biggest thorn which created all the inversion problem, then the refund problem, then the gaming of the system problem, shell company problem, and everything. Now, what we've done is to even it out largely. There are still one or two on which it was impossible to reconcile. I will still be working on it. So if the end and the beginning are both roughly the same, you don't have these inversions. That is one thing.

 

The second thing which created this confusion is the classification issue. Take the notorious example of popcorn… chocolate popcorn, salt popcorn… that's not my business to have to talk about it. But it was a necessity for Uttar Pradesh which wanted the Council to give a clarification, saying, how these two were being treated differently. I had to come out openly and say, “This is a request of the Uttar Pradesh government”. But people wondered why the FM was coming and talking on popcorn, and why should popcorn be treated differently at all. All that was because of the classification problems and we have sorted that out.

 

I will go further to say, trade or tax are all looked at from the HS code chapter wise allocation. This chapter has all those which are roughly similarly placed. Then you move to the next chapter, and so on. When I sat and spent a lot of time, I said: “Look, I respect your classification chapters and everything. Keep them 16-digit code numbers. But for me, if I have to look at it from the point of view of end duty, I want you all to go with a pencil and say — this is daily use, this is MSME, this is farmer….. and regroup them.” I wanted them to be kept in these five category groups — poor people's daily use, middle class aspiration, MSMEs, raw material and intermediary. Then farmer - pesticide, tractor, trailer, power tool, hull… Then the larger interest of the Indian economy… That exercise was done. Therefore, everything which is used by poor people today — monthly ration items — they come either at 5 per cent or goes to zero. Since 12 per cent is no longer there, majority goes here and few go into 18 per cent. That is how this whole thing was done, to get over this problem of classification once and for all.

 

Was there a pushback from the bureaucracy?

 

Surprisingly, they were not at all a hindrance. Only, it meant more and more work. I really salute them. Over these last eight months, just look at what the Department of Revenue (DoR) has done. No other part of the finance ministry, just the Department of Revenue. The new income tax law. Budget, passing of the budget in Parliament, this reform… all coming out of the DoR and its two boards. Salute to them. I didn't feel any resistance. The true spirit of wanting to reshuffle the whole thing was understood by them. They would come with something. I'll have a meeting, and after presentations and questions, they would go back and within couple of days, they'll come back on the same thing. My God, the number of meetings we held on this! I am telling you honestly, it was like rigorously preparing for a solid, good exam….

 

I don’t know what marks I will get, what number I will get, but I felt the rigorous preparation of an exam. You may sweat, but I feel rejuvenated.

 

Would you say the same thing about the state bureaucracy also?

 

To an extent, yes.

 

On the question on borrowing costs and bond yields, some state government loans have already devolved.

     

Yes, it is a matter of concern. We will have to see how to take it up.

 

Will you reduce your government borrowing this year?

 

At the moment, I have not taken any call on that.

 

The GST rate cuts will have a positive impact on inflation. Do you think the Reserve Bank of India (RBI) will have more leeway to cut rates?

 

They have their own assessments to make of the economy. How this rate reduction and rate rationalisation plays out is also something which they will study and then take the call. We will see how it goes.

 

The flexible inflation-targeting regime is about to complete a decade and the RBI has also initiated a consultation on four issues as part of its review that is due March 2026. Should any tweaks be considered in the framework to make it more effective? 

It’s assessment worthy. It’s a topic which has to be reviewed and understood, and see how best you want to move forward. But at this moment, I won’t take a position. We need to be careful about it. It’s tempting to say, ‘Oh yeah, get the food out of this basket, or it's tempting to say that the items which go into the determination of inflation are old and dated, we should change it. All that is there… partly relevant as well for the debate. But I think at this stage, I will refrain from taking a position or side. We still have to assess this.

 

Are you generally satisfied with it?

 

Yes, it has borne results, not just once, periodically. There are times when it went beyond, but largely, it's held good.

 

In the current geopolitical scenario, how challenging is policymaking in the government, not just in the finance ministry, but across the government?

 

Yes, it is challenging. But it is challenging only because you just don't know the contours of the challenge, nor are you in a position to even speculate on how it will pan out and how long it will last. So the uncertainty is seriously uncertain. Whatever is before you as a challenge is seriously not predictable. Uncertainty is truly an uncertainty, and I really cannot fix an intensity index for it.

 

Do you think with the US, relationship is likely to improve, after Mr Trump’s statement on special relationship with India? How do you see the current state of affairs between the two countries?

 

We have not made it deteriorate… Well, the trade negotiations are going on, the diplomatic people are engaged with one another. Business and industry still have relationship. Indians are going there, Indians are living there. People from the US are coming to India. That movement of people is still on. 

 

The PM spoke about next-generation reforms in his Independence Day speech. The government has now formed two new committees for these reforms. A very interesting feature of this committee is that they will submit a monthly report to the Department of Expenditure (DoE) in the finance ministry. While it may be difficult to replicate a big-bang reform like GST, can we expect some reforms being unveiled every month or so?

 

If the month by month reports give us any actionable point, yes, we’ll be doing it. If it’s just a status position which is being narrated, we cannot act on it. So it doesn’t mean that every month, I will have to do something. Whichever month, I have a reason to act on, I can.

 

The rupee has weakened against the dollar. Ours is one of the currencies that have weakened the most. How do you see this movement?

 

I don’t see it differently. If it is a volatility factor because of the dollar strengthening, it will affect it. Indian rupee versus any other currency is not going through such a phase. And it’s not just the rupee, but it is also other currencies even from the emerging market, which are facing this situation. That’s a reality. You will have to live with it.

 

We have started re-engaging with China. Are we looking to ease investment flows from there?

 

India has to have trade and investment relationship with as many countries. You are a growing economy, your need for investment is phenomenal. Any amount of investment coming in today, India can absorb it, and give good returns. So with our economy being like a sponge, which can take so much and more, we want investment from every part of the world, sovereign funds from every part of the world, because we can assure them of good returns.

 

You have talked about Press Note (PN) 3, and said it is possible that some things could change…

 

We’ve already sort of tried tweaking and flexing the PN 3 with regards to specialists who have to come for projects which are already on the ground but are not getting completed because they want the domain experts to come and do something. And if they have to come from China to that extent, some things have already been done. 

 

Is the large trade deficit with China still a concern?

 

Trade deficit with anybody… if it is so huge, I will want to change.

 

The labour codes are there, but they are not being enforced. You cannot get into land acquisition because it is not part of the Union government’s domain. So within your territory, is there anything more that needs to be done? When will we see the next round of GST reforms — for example, inclusion of petrol and diesel? 

Not in the immediate future.

 

Any other reform that you have in mind?

 

Within the finance ministry, the things which are standing out, and I need to push my efforts or press the pedal on, include disinvestment. And I will be working on it. There is no new agenda, but the existing agenda which sort of went in a slow motion because of many reasons… I’ll have to see which is the best way to revive and bring them on track. That is one thing which I have to do. I will also have to look at the central public sector enterprises: their efficiency levels, their growth because the DPE (Department of Public Enterprises) is with me. They'll have to look at the ways in which the ranking of all the ratnas happen - maharatna, miniratna and all that. So I want to get efficiency coming into the public sector enterprises. That’s a second one.

  One big thing which I'm already fully on is asset monetisation. It is another area in which I've spent a lot of time now to make sure that at least public sector undertakings which are sitting over huge asset do well. No doubt, we will have to professionalise them. They will have to run to bring in optimum utilisation of all the capacities, but asset monetisation is probably put by the side in the process of professionalising them. I want that to be bigger. Otherwise, it makes no sense for huge assets sitting which are just remaining to be unlocked. So I'll be paying a lot of attention there. 

Union Finance Minister Nirmala Sitharaman. (Photo: Finance Ministry)

 

That is a heavy agenda. Anything on the next-gen reforms for which the task force was set up?

 

Two ministers are heading the GoMs (Groups of Ministers) and two task forces are being led by officials, one the current cabinet secretary and another by the former cabinet secretary. All of them are looking at reforms. So we will be waiting for them to give their report.

 

Any timeline on that?

 

It is clearly something which has to be done at the earliest… .

 

The 8th Pay Commission, to be implemented from April 2026, hasn’t been constituted yet. Are you confident of implementing it from that date?

 

See, whether you want it or not, it has to be implemented from April 1. And I am not saying it is going to happen like this, but even if it is delayed, but happens a bit late, I will still have to honour it from April 1, 2026. Let us say, if it comes in May, I can't say I will do only from May or only from June. It has to be done from April 1. I will have to implement it.  

 

While all the attention has been on the GST rate changes, you have also significantly rationalised compliance norms and eased registrations so that they can be granted in three days. While the feedback from MSMEs is very positive on this, there is concern on the GST levy for job works done by MSMEs for the apparel sector rising to 18 per cent from 12 per cent...

 

 

There is no longer a 12 per cent. How will I take it anywhere else but 18 per cent? Services are all almost in 18 per cent. So as a service, it will go to 18. See ultimately, we may have an emotional attachment to a sector. We may have an emotional attachment to my constituency where there is a particular industry. I may see a sympathetic, humanitarian approach on one particular sector. I may see a job potential in a third. I cannot have GST satisfy me on this or that. Tax goes on a principle. I tax the value added in a particular process of manufacturing, or I tax a particular value addition because of the service component which comes in, and therefore, the tax moves accordingly… I have a great sympathy for job works because I also know in Tirupur, they depend on it. I cannot tweak it for that purpose. It falls under the category of service, you pay that much. It is for the manufacturer to reform his business formula accordingly. Tax cannot be emotional.

 

Do you think that, maybe in the future, the Council could still look at specific items’ rates?

 

I won’t speculate.

 

Lastly, do you expect your post-Budget interviews to happen from this building or in a new building?

 

I think it is going to be the new building. I would think even pre-Budget interactions will be in the new building.

 

Isn’t there an expectation that you will not leave this building soon? Is there a printing press there?

 

On the contrary, the expectation is that we clear it up sooner. We will be going lock, stock and barrel.