What Happened
- India's GST Council undertook a major rationalisation of the GST rate structure in September 2025, collapsing the earlier four-slab system (5%, 12%, 18%, 28%) into a simpler two-slab framework of 5% and 18%, with a new 40% slab introduced for luxury and sin goods.
- The changes, effective from 22 September 2025, removed the 12% slab — a longstanding demand from industry — while the 28% slab was abolished for most consumer durables, with those goods moving to 18%.
- Everyday items including selected food products (parathas, UHT milk, paneer) moved to the zero-rated category, providing direct relief to consumers and the food processing sector.
- Consumer durables such as air-conditioners, dishwashers, and televisions up to 32 inches moved from 28% to 18%, translating into effective price reductions of 8–9% for buyers.
- The government estimated a net revenue loss of approximately Rs 48,000 crore annually — reflecting a gross cut of Rs 93,000 crore offset partly by Rs 45,000 crore expected from the new 40% luxury slab.
Static Topic Bridges
The GST Council: Structure and Decision-Making under Article 279A
The GST Council is a constitutional body established by the 101st Constitutional Amendment Act, 2016, under Article 279A of the Constitution. It is the apex forum for all GST-related decisions in India, embodying the principle of cooperative federalism.
- Composition: Union Finance Minister (Chairperson), Union Minister of State for Finance or Revenue, and one minister nominated by each state/UT legislature.
- Quorum: One-half of total members.
- Voting: Decisions require a three-fourths majority of weighted votes of members present and voting. The Centre's vote carries a weight of one-third; all states together carry two-thirds.
- The weighted voting structure ensures neither Centre nor states can unilaterally push through rate changes — both must broadly cooperate.
Connection to this news: The September 2025 rate rationalisation was a decision of the GST Council requiring this weighted three-fourths majority, representing a negotiated consensus among the Centre and 28 states.
GST Rate Slabs and Revenue Neutral Rate
India's GST was designed around four standard rate slabs — 0%, 5%, 12%, 18%, 28% — plus a cess on top of the 28% slab for demerit goods. The Revenue Neutral Rate (RNR) is the rate at which total GST revenue equals the combined revenue from the pre-GST indirect tax system. India's original RNR was estimated at around 15–15.5%.
- 0% (exempt): Essential food items, healthcare, education.
- 5%: Daily necessities, items of mass consumption.
- 12%: Processed food, some industrial goods (now abolished in 2025 rationalisation).
- 18%: Standard rate for most goods and services.
- 28% + cess: Luxury items, tobacco, aerated drinks (28% slab now largely replaced by new 40% category for select goods).
- The inverted duty structure — where input taxes are higher than output taxes — has been a persistent problem distorting certain sectors like textiles and fertilisers.
Connection to this news: The 2025 rationalisation directly addresses the long-standing criticism that four slabs created classification disputes, litigation, and an inverted duty structure in several industries.
Inverted Duty Structure and Its Economic Distortions
An inverted duty structure arises when the GST rate on inputs is higher than the GST rate on the finished good. This forces manufacturers to accumulate input tax credits (ITC) that they cannot utilise, effectively creating a working capital blockage.
- Sectors most affected: textiles, fertilisers, footwear, pharma intermediates.
- Under an inverted structure, manufacturers effectively pay tax on their value addition and are reimbursed only partially through refunds, creating cash-flow distortions.
- Rationalisation — by aligning input and output tax rates — removes this distortion.
- The government periodically issues refunds for accumulated ITC under inverted structures, which adds to its fiscal burden.
Connection to this news: Simplifying from four slabs to two (plus the 40% luxury rate) is expected to reduce the incidence of inverted duty structure, streamline refunds, and lower compliance costs for businesses.
Fiscal Federalism and GST Compensation
GST replaced multiple central and state taxes (central excise, service tax, VAT, CST, octroi), pooling revenue into a common base shared between Centre and states. States were initially guaranteed 14% annual revenue growth for five years via the GST Compensation Cess.
- GST compensation period ended in June 2022 — states now bear full revenue risk from rate changes.
- The Compensation Cess on luxury/sin goods continues, now financing back-loans taken by the Centre on states' behalf during the COVID period.
- Any major rate cut that reduces GST collections impacts states' shares directly — making rationalisation politically sensitive.
- Net revenue loss of Rs 48,000 crore from the 2025 rationalisation will be split proportionally, affecting states' budgets.
Connection to this news: The net revenue loss of the September 2025 rationalisation underlines the fiscal trade-off — lower consumer prices come at a cost that both Centre and states must absorb, raising questions about fiscal sustainability in the medium term.
Key Facts & Data
- GST was introduced on 1 July 2017, subsuming 17 central and state levies.
- Article 279A inserted by the 101st Constitutional Amendment establishes the GST Council.
- Original GST slabs: 0%, 5%, 12%, 18%, 28% + cess.
- Post-September 2025 rationalisation: 5%, 18%, 40% (luxury/sin goods).
- Net annual revenue impact of rationalisation: estimated loss of Rs 48,000 crore.
- Gross rate cuts: Rs 93,000 crore; partially offset by Rs 45,000 crore from new 40% slab.
- Consumer durables (ACs, large TVs, dishwashers): moved from 28% to 18%.
- Several food items (parathas, UHT milk, paneer): moved to 0%.
- GST Council voting: Centre = 1/3 weight; all states combined = 2/3 weight; 3/4 majority required for decisions.