GST RATE CUTS ≠ PRICE REDUCTION, IMPACT OF GST REFORMS EXPLAINED
Introduction
When the Goods and Services Tax was launched in 2017, it was sold as India’s tryst with a one nation, one tax destiny. It promised to sweep away the clutter of excise, service tax, VAT, and a dozen other levies that had long weighed on businesses and confused consumers. In its early days, GST felt like a grand experiment, sometimes clunky, often criticised, but undeniably ambitious. Over the years, it evolved through countless council meetings, tweaks, and clarifications, slowly shedding its rough edges. Small traders grappled with compliance, states bargained for their share, and consumers learned to calculate what each slab meant for their wallets. In this eight-year journey, GST has come to symbolise both India’s aspiration for efficiency and its struggle with execution. And now, with the announcement of the so-called Next Gen Reforms, the government claims it has finally found the balance between simplicity and fairness. However, despite the most favorable macroeconomic backdrop India has seen in years where the Reserve Bank of India (RBI) has driven down the repo rate to 5.50%, retail inflation has cooled dramatically to the 2-3% range, and GDP growth has surged to 7.8% in the April–June quarter, the lived experience of the average Indian tells a different story. These numbers suggest an economy firing on all cylinders, one that should leave households feeling secure and businesses optimistic. Yet, step outside the official statistics and the ground reality feels far less buoyant. Families continue to complain of stubbornly high food and fuel costs, small enterprises remain stretched, and consumer demand looks patchy at best. One begins to wonder, are these headline figures capturing the real story, or merely polishing the surface while the underlying struggles remain unchanged? It is against this curious backdrop that the government has rolled out its Next Gen GST reforms, promising to reshape how India consumes and pays.
Changes in GST Rates
The government’s new reforms have dramatically redrawn the GST map. For the first time since its inception, the complex web of four major slabs, 5, 12, 18, and 28 per cent, has been collapsed into just two – 5 and 18 per cent, with a hefty 40 per cent sin and luxury bracket sitting above them. Officials have hailed this as the simplification businesses and consumers have long demanded, an effort to both unclutter compliance and soothe wallets in one stroke. But the story looks very different when you trace the reforms across sectors. In the household essentials space, the reforms are being marketed as a festival-time bonanza. Everyday items like soaps, shampoos, toothpastes, noodles, biscuits, and chocolates have been shifted down to the 5 per cent bracket, while basics like bread, paneer, milk, and several pulses have been freed from GST altogether. On paper, this should make the monthly grocery bill lighter. Yet the real question is whether retailers and FMCG companies will pass on these tax benefits fully or quietly use them to shore up their margins.
In healthcare and insurance, the reforms sound even more generous. Premiums for individual life and health insurance have been brought down to zero GST, making policies theoretically cheaper for millions of families. To add to that, a list of critical medicines, including cancer therapies and drugs for chronic illnesses, has been exempted entirely. It is a move that could bring genuine relief to households struggling with medical costs. But here again, much depends on how insurers and hospitals recalibrate their pricing and whether patients will truly see the difference in their final bills.
The automobile and consumer durables sectors are being called the biggest winners of this overhaul. Cars that once attracted the dreaded 28 per cent slab now sit comfortably in the 18 per cent bracket, as do air conditioners, refrigerators, televisions, and washing machines. Cement, too, has shifted down to 18 per cent, potentially lowering construction costs and housing prices. The government hopes this will ignite aspirational spending and boost demand just ahead of the festive season. Yet, analysts point out that companies often adjust ex-showroom prices strategically, meaning the headline GST cut may not always mirror the final on-road discount.
At the other end of the spectrum, the government has not been shy about raising the hammer on what it deems undesirable consumption. Tobacco products, aerated drinks, luxury cars, and similar indulgences now attract a punishing 40 per cent GST. The official line is that these goods deserve to remain out of reach, both to protect public health and preserve fiscal revenue. Whether this aggressive stance curbs consumption or simply fattens black-market channels is a debate that will play out in the months to come.
Registration, Refunds, and Compliance
Alongside the restructuring of tax rates, the GST Council has also introduced a series of procedural and trade facilitation measures designed to simplify compliance, accelerate refunds, and remove ambiguities in existing provisions. These changes are meant to improve the ease of doing business while aligning GST administration with the broader goals of transparency and efficiency. Refunds are a central focus of the new measures. The Council has recommended an amendment to Rule 91(2) of the CGST Rules, 2017, to allow for risk-based provisional refunds on zero-rated supplies such as exports and supplies to Special Economic Zone units. Under this framework, 90 per cent of the refund claimed will be sanctioned provisionally based on system-led risk evaluation, while exceptional cases may undergo detailed scrutiny. Similar risk-based provisional refunds have also been proposed for cases arising from the inverted duty structure, where input tax credits exceed output liability. Both provisions are scheduled to be operational from November 1, 2025. Additionally, Section 54(14) of the CGST Act will be amended to remove the threshold limit for refunds in respect of low-value export consignments. This will particularly benefit small exporters who send goods through couriers or postal modes.
The reforms also include changes to the GST registration process. A simplified registration scheme is being introduced for small and low-risk businesses. Under this system, eligible applicants will be granted registration on an automated basis within three working days of application, provided their output tax liability on supplies to registered persons does not exceed INR 2.5 lakh per month. This scheme, which will be optional and allow voluntary opting in and out, is expected to benefit around 96 per cent of new applicants. A parallel scheme is also being developed for small suppliers operating through e-commerce platforms across multiple states. This will allow such suppliers to obtain simplified GST registration without the need to maintain a principal place of business in each state, addressing one of the most significant compliance hurdles for e-commerce participants.
Another important change relates to the place of supply rules for intermediary services. Clause (b) of Section 13(8) of the IGST Act, 2017, is to be omitted. Once this amendment is made, the place of supply for intermediary services will be determined by the default rule under Section 13(2), which is the location of the recipient. This modification is expected to help Indian service providers qualify their intermediary services as exports and avail associated export benefits. The treatment of post-sale discounts has also been clarified. Amendments to Sections 15 and 34 of the CGST Act will remove the earlier requirement that discounts must be pre-agreed and specifically linked to invoices. Instead, discounts can now be granted through credit notes under Section 34, with corresponding provisions for the reversal of input tax credit by the recipient where applicable. Circular No. 212/6/2024-GST, which previously outlined compliance mechanisms for such cases, will be rescinded. A new circular will be issued to provide clarity on issues such as whether post-sale discounts through financial credit notes require ITC reversal, how discounts offered by manufacturers to dealers are treated in dealer-to-customer transactions, and the treatment of discounts offered instead of promotional activities undertaken by dealers. Finally, the council has also recommended the adoption of retail sale price-based valuation for certain goods such as pan masala, cigarettes, gutkha, chewing tobacco, zarda, scented tobacco, and unmanufactured tobacco. Amendments to the CGST Rules, 2017, and related notifications will operationalise this change, ensuring uniformity in tax valuation for these products.
What will be the impact?
The recent GST rate reductions, though significant in policy terms, may not translate into actual relief for consumers, primarily because the mechanism to enforce the passing on of benefits is being dismantled. Under the GST regime, Section 171 of the CGST Act and the corresponding anti-profiteering framework mandated that any reduction in the rate of tax, or benefit of input tax credit, must be passed on to the recipient by way of a commensurate reduction in prices. This was enforced through the National Anti-Profiteering Authority (NAA) and later handled by the Competition Commission of India (CCI). However, with effect from April 1, 2025, these anti-profiteering provisions are being discontinued, and the government has categorically stated that they will not be revived. In practical terms, this means that businesses will no longer face statutory scrutiny or penalties if they choose to retain the benefits of rate cuts instead of lowering prices. The government has indicated it will instead engage with industry through dialogue and persuasion to encourage voluntary compliance. For consumers, this shift raises a critical concern: without the legal compulsion that previously existed, the extent to which GST rate reductions will actually reach the marketplace remains highly uncertain, making the relief more theoretical than tangible.
The impact of these sweeping reforms will depend on how effectively they translate into real benefits for consumers and businesses. On the surface, the consolidation of GST slabs into a simpler two-rate structure reduces confusion, lowers classification disputes, and brings India closer to international models of indirect taxation. For businesses, lower rates mean fewer compliance disputes and easier accounting. For consumers, lower rates on essentials, medicines, and household goods should, at least in theory, reduce prices. However, the true extent of relief at the consumer level will depend on how businesses choose to pass on these benefits. Experience with previous rate cuts suggests that companies often adjust their pricing structures to preserve margins, meaning the end consumer may see only a partial reduction in cost. In healthcare and insurance, while exemptions look promising on paper, insurers and hospitals have wide discretion in how they structure premiums and fees, which could dilute the actual benefit. Remember, the insurance companies will now be denied any kind of input tax credit, so that is another cost burden for them. Similarly, in automobiles and appliances, the reduction from 28 per cent to 18 per cent is substantial, but the final retail price may also reflect manufacturer strategies, input costs, and demand expectations.
On the fiscal side, these reforms are likely to create significant revenue pressure. The GST Council’s own discussions have highlighted concerns of a revenue shortfall for both the Centre and the states. By removing GST from essentials and drastically reducing rates on large-ticket items like cement and automobiles, the government has foregone a major chunk of tax collections. The higher 40 per cent slab on luxury and sin goods will not be sufficient to fully offset this loss, especially given that consumption in those categories is limited. This raises the question of whether states will demand additional compensation, reviving a long-standing tension in India’s federal fiscal framework.
Conclusion
The timing of the reforms also points to the government’s urgency. With inflation already low and GDP growth figures among the highest globally, there was no pressing macroeconomic need to cut rates now. Yet the decision comes just ahead of the festive season and in the shadow of upcoming political cycles. The reforms appear to be aimed as much at reviving consumer sentiment and boosting demand as at simplifying tax administration. For the government, the Next Gen GST package serves the dual purpose of showcasing decisive reform and attempting to ensure that the feel-good factor finally catches up with the strong numbers being broadcast. In this sense, the reforms are both ambitious and risky. Ambitious, because they attempt to reset the indirect tax regime with bold simplification and consumer-facing relief. Risky, because the fiscal space for states is already stretched, and the gap between headline tax cuts and actual consumer benefit could lead to disappointment. Whether these measures succeed in creating visible change in household budgets and market demand will determine if they are remembered as a transformative step forward or as another policy move that looked stronger on paper than in practice.