The impact of GST rates and reforms on the Indian economy

As India moves toward a three-slab system with new GST rates introduced in GST 2.0, which include 5%, 18%, and 40% taxes, the Goods and Services Tax (GST) has a significant impact on the Indian economy.

What is GST?

The Goods and Services Tax (GST) is India’s largest indirect tax reform, introduced on 1st July 2017 with the vision to replace a complex system of central and state indirect taxes with a single tax system to accomplish the “One Nation, One Tax, One Market” formula and strengthen digital tax administration. GST is levied at each step of the production and distribution chain and works as a destination-based tax, meaning tax revenue is collected where goods and services are consumed rather than where they are manufactured. The Central Government of India observes July 1st as “GST Day.”

GST Before and After: A Quick Comparison

Before the implementation of GST in India, businesses faced a complex web of taxes at different stages of production and sale. GST replaced all pre-existing taxes, such as VAT, service tax, excise duty, and CST, and created a unified national market, reduced the tax cascading effect, and increased government revenue through better tracking of online and offline transactions.

GST simplified the system into four major slabs that were 5%, 12%, 18%, and 28% at the time of launch, depending on the nature of goods and services. Essential items such as food and medicines were taxed at the lower brackets, while luxury and sin goods were put under the higher tax slab with additional cess. The structure reduced cascading taxes, but small businesses found compliance difficult due to digital filing norms and frequent changes in GST rates and rules.

GST Rate Changes and New Tax Structure GST 2.0

The new Goods and Services Tax (GST) rates are known as Next-Gen GST Reforms. It was to reduce slab complexity and became effective from September 22, 2025. In this GST 2.0, all the previous four-tier taxes are removed, and only primarily two main slabs of 5% for essentials and 18% for most other goods and services are kept. A special 40% rate was also introduced for select luxury and “sin” goods, or demerit goods, such as cigarettes, cigars, tobacco, alcoholic beverages, and other products that are harmful to health and society.

Impact of GST on the Indian Economy

With recent proposals to reduce slab complexity and merge rates, there are both advantages and disadvantages, but GST has been widely praised and accepted as a good tax reform. Elimination of cascading taxes and improvement in online tax filing procedures are its primary advantages. An easy tax system has increased transparency and government revenue collection. Essential goods and services in India are generally fully exempt from GST, that means there is zero (0%) tax on fruits, vegetables, stationery items, and healthcare services.

Many everyday-use items and essential services have lower rates of 5%, increasing demand, especially among middle-class families and urban consumers. Reduced compliance costs and streamlined returns will help small businesses and MSMEs and reduce unemployment. Economically, the slab cuts help support agriculture and manufacturing in India. New tax reforms are expected to support higher GDP growth, boost “ease of doing business,” improve tax buoyancy, and build stronger formalization of businesses.