GST reforms may lead to lower effective rates and higher revenues in the long run: S&P Global
S&P Global Ratings anticipates thatthe proposed GST reforms, aiming for a two-slab system (5% and 18%), could increase long-term revenue for the government despite a potentially lower effective tax rate. The simplification is expected to reduce accounting errors and improve tax collection. While some items may shift to lower brackets, the streamlining could boost consumption and offset revenue losses.
New Delhi: The proposed reforms in the GST (Goods and Services Tax) slabs could lower the effective taxation rate in India while simultaneously boosting the government coffers over the longer term, said S&P Global Ratings Director YeeFarn Phua on August 19.
The comments came ahead of the crucial GoM (Group of Ministers) meeting between the Center and state governments to discuss the proposed GST reforms by PM Modi. The GST Council meeting is the sole responsible body to decide upon the matter in the future.
Proposed Two-Tier GST Reforms
The Union Government is proposing reforms in the GST slabs. The proposal aims to reduce the slabs into two rates, viz., 5 percent standard rate and 18 percent merit rate. Reports also indicate that a special tax rate of 40 percent on a select few sin goods items like tobacco, gambling, etc. is to be levied.
Presently, there exist four slabs under GST, viz., 5 percent, 12 percent, 18 percent, and 28 percent. The GST is one of the important sources of government. In FY25, GST collection reached an all-time high of Rs. 22,08,000 crore (US$ 257 billion), registering a 9.4% YoY growth, as per an official press release from the government on June 30, 2025.
In a response to the question on the impact of GST rate rationalisation on the government revenue, Phua said that the current GST regime is complicated because it contains four different rates, which leads to accounting errors and and creates problems in implementing the regime.
"With the proposed 2-rate system being looked at, though the effective rate could be somewhat lower, because of easier implementation and accounting process, there could be a boost to fiscal revenues over longer term," Phua said, as quoted by PTI.
Now that the proposal is being deliberated both at the center and state levels, the S&P Global director said the reforms in GST are unlikely to hit the government revenue.
"Overall, we don't think it would be a major drag on fiscal revenue. With lower rates and clearer implementation, it is possible to boost consumption spending in short-term as well. That is something we are watching out for," Phua said.
As per the proposal, 99 percent of items currently in the 12 percent slab are set to be shifted to the 5 percent slab, while 90 percent of items in the 28 percent slab are set to be positioned in the 18 percent slab.
The proposed changes are set to reduce the classification disputes, frequent litigation, and GST evasion as well as to remove duty inversion.