India’s Two-Tier GST Reform: Long-Term Revenue Gains Ahead

GST Reform in India Latest News

• S&P Global Ratings noted that the proposed two-tier GST structure could reduce the effective taxation rate while boosting long-term fiscal revenues.
• The Centre’s proposal, to be discussed with states in an upcoming meeting, aims to simplify GST by reducing the slabs to just 5% and 18%, along with a special 40% rate for select luxury or sin goods.
• This reform is expected to streamline compliance, reduce complexity, and potentially increase government revenues over time, though its short-term impact on collections and affordability remains to be seen.

The Proposed Two-Slab GST System

• The central government plans to move from the current four-rate GST structure to two slabs of 5% and 18%, with an additional 40% rate for sin and demerit goods. 
  • Currently, there are 4 slabs under GST — 5, 12, 18 and 28 per cent and the taxation system has been an important component of the government’s revenues.
• This reform is expected by the end of 2025 and aims to simplify compliance while reducing distortions in the indirect tax regime.
• The changes will reduce classification disputes, scope for litigation and evasion as well as remove duty inversion.

Declining Effective GST Rates

• Since its launch in 2017, GST rates have been gradually reduced. 
• An RBI study in 2019 found that the weighted average GST rate had dropped from 14.4% to 11.6%, achieved through base broadening and removing distortions. 
• This trend is expected to continue under the new structure.

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S&P’s Position on GST Reform

• S&P Global Ratings has dismissed concerns that the Centre’s proposal to reform the Goods and Services Tax (GST) regime will harm fiscal revenues. 
• Director of the organisation explained that while tax rates may appear lower under the proposed two-slab system, simplified implementation and transparent accounting could actually improve revenue collection in the long run.
• It highlighted that GST has been a key driver of fiscal revenues over the past five to six years. 
• S&P believes reforms will continue strengthening government finances rather than weakening them, even if short-term adjustments create some pressure.

Debt and Fiscal Targets

• S&P forecasts the combined central and state fiscal deficit at 7.3% of GDP in 2025–26, narrowing to 6.6% by 2028–29. 
• Interest servicing remains a heavy burden but should ease gradually due to stronger revenues and cheaper financing.
• India’s debt-to-GDP ratio is projected to fall from 83% in 2024–25 to 78% by 2028–29, with the Centre targeting 49–51% by 2030–31.

Rating Upgrade and Long-Term Outlook

• S&P upgraded India’s rating to BBB from BBB-, citing its robust economic performance.
• The agency stressed that India’s reforms, including GST rationalisation, support long-term fiscal sustainability despite short-term uncertainties.
• It upgraded India’s rating to BBB from BBB- citing:
  • Strong and resilient economic expansion.
  • Political commitment to fiscal discipline.
  • Improved quality of government spending through higher capital expenditure.
  • A credible monetary policy framework ensuring controlled inflation.

Economists’ Perspective on Fiscal Impact

• Economists note that state governments could face revenue losses estimated at ₹7,000–9,000 crore annually. 
• However, these may be offset by stronger GDP growth, which boosts both direct and indirect tax collection. 
• For 2025–26, the central government’s fiscal deficit impact is expected to be less than 0.1% of GDP.

Source: IE | ET | BS