Prime minister (PM) Narendra Modi promised ‘next-generation’ GST (goods and services tax) reforms as a Diwali gift to India, triggering hopes of reduction and rationalisation of the tax into two primary slabs and an overall relief for all. However, businesses and consumers are watching with trepidation to see whether the tax actually lights up the festive season and the economy, or fizzles out in confusion and disappointment, once again.
The PM’s promise is undeniably appealing and was greeted with joy. Rationalised GST slabs, simplified compliance for small businesses and faster refunds will lead to a structural shift that could spark high consumption. But every day counts towards the promise and, without a quick decision, the ‘gift’ may throw India’s biggest sales season into chaos and disruption.
Make-or-break Moment
The festive season traditionally drives around 30% to 40% of annual sales for several categories. In India, some would say it begins with the Independence Day sales designed to beat the monsoon slump. But, traditionally, it starts just before Navratri, which starts on 22nd September this year, and extends to Diwali, which begins on 20th October. The festive season is already compressed by the shraddh period (from 7th to 21st September), which is considered inauspicious by Indians for any major life decisions.
While consumers have the luxury of making last minute decisions and to wait for a possible price drop, companies need to work far ahead. They usually ramp up production by 10% to 20%, hire seasonal workers, fine-tune inventory with data analytics and boost sales through marketing campaigns and discounts, especially for high-margin goods like electronics, appliances, automobiles and apparel. Fashion and electronics dominate festive buying; mobiles and lifestyle goods comprise over half of the sales. Past data suggests that consumers spend 33% on apparel, 27% on mobiles, 18% on electronics, with jewellery and automobiles also showing spikes on auspicious days.
Until the Trump threat and PM’s Diwali promise, e-commerce alone was expected to contribute Rs1.2 lakh crore in gross merchandise value (GMV), up 27% from 2024. A delay in announcing new GST rates could shatter this momentum. PM’s promise has built high expectations and any divergence from what consumers, investors and industry expect would have a negative impact.
Consumers are already deferring purchase decisions on high-value items, such as cars and televisions in anticipation of an 8% to 9% price drop. On the other hand, retailers, e-commerce and quick commerce players are worried about chaos over pricing and invoicing chaos, if GST slabs are announced well into the season. If nothing else, they are finding it difficult to launch marketing campaigns with clear price offers and, according to experts, are hesitating to build the usual inventory in anticipation of higher sales.
Unless government understands the need for quick decisions, the promised gift would end up in lost sales, piled-up inventory and operational headaches for business. On the other hand, companies could also invite government wrath, if they hike prices prior to the GST announcements and deny consumers the full benefit.
Simplification Must Accompany Rationalisation
While consumers are focussed on tax reductions, it is also time to address the bizarre distinctions that have plagued India’s GST regime and have made headlines from time to time.
Take the roti–paratha divide: both are wheat-based breads; however, packaged frozen parathas attract 18% GST; but if sold as a humble roti, GST is 5%. The differential slab, ruled an appellate body, came from the need to heat the frozen paratha (although packaged rotis are also heated by most people)!
Remember the furore and meme fest over irrational popcorn taxes and cream buns? The plain, loose variety of popcorn is taxed at 5%; branded and packaged is taxed at 12%. And, if it is caramelised with sugar, the ‘good and simple tax’ hits you with 18%. Then there is the bun controversy – plain buns are tax-free, but cream buns are taxed at 18%.
NJ Jain Associates has a detailed article decoding the ‘GST Food Conundrum’ which attempts to explain why seemingly similar foods carry different taxes. Or why sweets are taxed at 5% but savouries at 12%; or why ice-cream in an ice-cream parlour would be taxed at 18% but only 5% in a restaurant (apparently the parlours sell already manufactured ice-cream!).
While merely irritating or amusing to most people, for businesses, it is a struggle to get it right and can lead to tax notices and harassment.
It is not as if the government is unaware that GST today is a far away from the ‘one nation, one tax’ slogan that had promised to replace the jumble of excise, service tax, VAT(value-added tax) and local levies into a dual structure with a seamless input credit mechanism. The dual structure would comprise Central GST (CGST), state GST (SGST), and integrated GST (IGST). Initial slabs ranged from 5% to 28%, with special rates (0.25%, 3%) and a compensation cess for sin goods. A five-year compensation mechanism (ending June 2022) guaranteed states 14% annual revenue growth from the 2015-16 base.
In 2015, the revenue neutral rate (RNR) committee chaired by chief economic adviser Arvind Subramanian had also argued for what has now been promised by the PM: a merit rate for essentials, a standard rate for most goods and services and a higher rate for demerit or sin goods. It also argued for simple classification that would make compliance easy and avoid litigation.
Instead, we have five slabs (0%, 5%, 12%, 18% and 28%), along with cesses and special rates. Worse, we have absurd, hyper-technical distinctions that lead to controversy and litigation. A far cry from the Kelkar committee’s proposals and caveats.
The Reform Blueprint
As I write this piece, the GST council’s proposals are already being discussed by the media. It is expected that GST will now have three classifications. A basic 5% merit list which is expected to comprise essentials such as food, garments, medicine (most of which are taxed at 12% today) and, hopefully, insurance, utilities, etc, that are taxed at a high 18%.
Almost everything else is likely to be in the 18% tax bracket – with some items like refrigerators and televisions dropping from 28% which could have a big impact on purchase decisions.
A few categories like tobacco, alcohol and super luxury cars will be in the 40% sin-tax with serious implications for some products which may see a bump up from 28%. Meanwhile, certain products like jewellery and precious metals will remain under 1%.
The big question is: Will GST 2.0 go beyond pruning rates and settle the confusion over categorisation, as well as revenue share with states -- which get 50% of GST revenue with only 28% going to the Centre? Eight Opposition-ruled states have already warned that GST reductions could lead to a 15%-20% revenue loss to them which could impact their welfare spending. They need to be compensated without allowing the issue to blow up and cause delays.
Every day of delay is already costing business and industry, since their festival production and inventory planning, pricing and marketing campaigns are in limbo. Sales experts will tell you that deferred decisions don't always materialise.
The problem is that this may not matter to bureaucrats who are satisfied with the latest numbers showing a 6.5% growth in GST collections year-on-year, with robust domestic collection of over 9.6% which offset lower collection on imports.
To deliver on the ‘Diwali gift’, the GST council must act with urgency and coherence—slashing nonsensical classifications, clarifying timelines and empowering businesses to plan. Otherwise, this season’s cheer could turn into confusion, disappointment and delayed economic vitality.
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