Simplified Tax Structure and Faster Processes Set to Boost India’s Economy
In a landmark decision aimed at transforming India’s tax landscape, the Goods and Services Tax (GST) Council, during its 56th meeting on September 3, 2025, approved sweeping measures to ease compliance for businesses and rationalize tax slabs. Chaired by Union Finance Minister Nirmala Sitharaman, the two-day meeting in New Delhi focused on reducing bureaucratic hurdles for micro, small, and medium enterprises (MSMEs) and startups, while proposing a streamlined two-slab tax system. These reforms, hailed as a step toward a more business-friendly economy, are expected to lower costs for consumers, boost domestic consumption, and mitigate the impact of global trade challenges.
Streamlined Compliance for MSMEs and Startups
The GST Council has slashed the registration timeline for MSMEs and startups from 30 days to just three, a move designed to accelerate business onboarding and reduce administrative delays. This reform, effective immediately, targets non-risky applicants, with risk classification determined by data analytics from the GST Network (GSTN). Additionally, the Council greenlit automated GST refund processes for exporters, ensuring refunds are processed within seven days based on risk analysis. Small refunds up to ₹1,000 will be facilitated through the ICEGATE platform, clearing an estimated 1.5 lakh pending shipping bills. These measures aim to enhance liquidity for exporters and small businesses, freeing up working capital for growth.
Radical Tax Slab Overhaul
A cornerstone of the Council’s agenda was the rationalization of GST tax slabs, reducing the current four-tier structure (5%, 12%, 18%, and 28%) to a simpler two-slab system of 5% and 18%. Approximately 90% of goods currently taxed at 28%—including electronics, automobiles, and consumer durables—will shift to the 18% bracket, while 99% of items in the 12% slab, such as footwear, apparel, and certain food products, will move to 5%. Luxury and “sin” goods, like tobacco, high-end cars, and liquor, will face a new 40% tax rate, replacing the expiring Compensation Cess with a proposed Health or Green Energy Cess. This overhaul is projected to reduce consumer prices and stimulate demand, offsetting an estimated ₹50,000 crore revenue loss through increased consumption.
Economic Boost for Key Sectors
The tax reforms are poised to benefit eight critical sectors: textiles, fertilizers, renewable energy, automotive, handicrafts, agriculture, health, and insurance. Notably, the Council is considering exempting life and health insurance premiums, currently taxed at 18%, from GST altogether, offering significant relief to the middle class. Lower tax rates on daily-use items like toothpaste, bicycles, and sewing machines, now shifted to the 5% slab, are expected to make essentials more affordable. In labor-intensive sectors like automobiles and consumer electronics, reduced taxes could spur production and job creation, aligning with the government’s Atmanirbhar Bharat vision to strengthen domestic manufacturing.
Addressing Global Trade Challenges
The timing of these reforms is critical as India faces potential economic headwinds from 50% tariffs on $48 billion worth of exports to the United States, announced by the Trump administration in August 2025. The GST Council’s strategy to lower tax rates is designed to boost domestic consumption, compensating for export-related losses. By making goods more affordable, the government aims to increase unit sales, encouraging manufacturers to expand production and hire more workers. Industry experts estimate that these reforms, combined with recent income tax cuts, could lift consumption by ₹5.31 lakh crore, equivalent to 1.6% of India’s GDP, according to a 2025 SBI Research report.
Political and Fiscal Challenges Ahead
Despite the optimistic outlook, the proposed changes face resistance from non-BJP-ruled states, including Tamil Nadu and West Bengal, which are concerned about the ₹50,000 crore revenue shortfall. These states, gearing up for elections in 2026, have demanded compensation to offset potential losses, citing the sharp revenue disparities across the current slabs—67% from 18%, 11% from 28%, and 5% from 12%. The Council’s deliberations, informed by eight years of GST data, aim to build consensus through a phased implementation to minimize fiscal disruption. The introduction of pre-filled GST returns and digital invoicing updates is also under discussion to further reduce compliance burdens and curb tax evasion.
A Step Toward GST 2.0
The reforms mark the dawn of “GST 2.0,” a vision articulated by Prime Minister Narendra Modi during his Independence Day address on August 15, 2025. Described as a “Diwali gift” for citizens, the simplified tax structure and eased compliance measures are set to roll out by October 2025, aligning with the festive season. By addressing inverted duty structures in sectors like textiles and footwear, the Council aims to enhance manufacturing competitiveness and formalize the unorganized sector. With the GST Council meeting again in late September to finalize these changes, India’s economy is poised for a transformative boost, balancing consumer relief with sustainable growth.
(India CSR)
