Goods and Services Tax (GST): is now also Good and Simple Tax

“A tax system is like plumbing: the smoother the flow, the fewer the leaks.” — MS Mani, Partner at Deloitte India

This post explains the concept of Goods and Services Tax (GST), why it was introduced, how it works, and why the Indian government is now moving from four slabs to two. We’ll look at what this means for consumers, businesses, and the economy.
Economics & Policy
Author

Satvik Raman

Published

August 30, 2025

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Understanding GST

The Goods and Services Tax, or GST, is one of the biggest reforms in India’s tax history. It was launched on July 1, 2017, with the idea of replacing a messy system of indirect taxes that existed earlier. Before GST, there were too many taxes like excise duty, service tax, VAT, octroi, and entry tax. Different authorities collected them at different points, and businesses had to spend a lot of time trying to stay compliant.

To see how confusing things were before GST, imagine the lifecycle of a shirt. If a factory in Tamil Nadu produced it, the Central Government would collect Excise Duty as soon as the shirt left the factory gate. When it was sold within Tamil Nadu, the State Government would then collect VAT on that sale. Since VAT was calculated on top of the excise duty already paid, the result was a “tax on tax”. If the same shirt travelled from Tamil Nadu to Karnataka, the layers of tax multiplied. Tamil Nadu would keep Central Sales Tax (CST) on the inter-state sale, Karnataka could impose an Entry Tax when the shirt crossed its borders, and local city bodies might also add Octroi when the goods reached a municipal limit. Finally, Karnataka would again collect VAT when the shirt was sold to the consumer. With every state having different rules and rates, you can imagine the headache both for businesses and for buyers.

The introduction of GST aimed to fix this by creating “One Nation, One Tax.” Instead of separate taxes at each level, GST combined them into a single system. When you buy something within your state today, the tax is split into two parts: CGST goes to the Centre and SGST goes to the State. If goods move across states, there is IGST, collected by the Centre and then shared with the states.

Benefits of GST

One major benefit of GST is that it removes the cascading effect of multiple taxes. Since the tax is only charged on the value added at each stage, the final price of goods and services comes down in the long run. It also makes prices more uniform across states, which helps create a common national market.

Another benefit is that GST encourages more people and businesses to join the formal economy. If your turnover crosses a set limit, you must register for GST. Registration also has advantages: businesses that are registered can claim something called Input Tax Credit (ITC). Here’s how ITC works in simple terms. Imagine a tailor buys cloth from a mill and pays GST on it. Later, when he sells stitched shirts, he collects GST from his customers. Instead of paying all that tax again, he subtracts the GST he already paid on the cloth. This way, tax is only applied to the value he added through stitching. However, he can only claim this benefit if the mill is also GST registered. That creates a chain effect where one business nudges the other to come into the GST system.

The digital nature of GST has also reduced the scope for “cash only” deals. Buyers often ask for proper invoices because they want their input credit. This leaves less room for sellers to avoid reporting sales.

The decisions on rates and exemptions are taken by the GST Council, a body made up of the Union Finance Minister and the finance ministers of all states. They meet regularly to review collections and propose changes.

News: Simplifying GST Slabs

Right now, GST has four main slabs: 5%, 12%, 18% and 28%. But the government has announced plans to cut them down to just two slabs: 5% and 18%, with a higher rate still applying to “sin goods” like tobacco and luxury cars.

Why simplify? The current four-slab structure often leads to disputes. For example, if a product can be classified as either a 12% item or an 18% item, businesses and tax officials can end up in arguments. A two-slab system reduces this confusion and saves compliance costs.

For consumers, this means that many items which were earlier taxed at 12% or 28% will now move to lower slabs, making them cheaper. Everyday goods like food and household items may come under 5%, while big-ticket items like cement and cars could see rates fall to 18%. For the middle class, this could provide real relief in their monthly budgets.

Industries such as textiles, auto components, cement, and FMCG are also expected to benefit. Lower GST will make Indian products more competitive in exports as well. Economists point out that this change brings India closer to global practices since countries like Australia and Canada mostly follow simpler GST systems with one or two slabs, usually between 5% and 15%.

Conclusion

GST was always meant to be a unifying reform. With the new move to simplify rates from four slabs to two, the government hopes to make the system fairer and easier for both businesses and consumers.

The timing is also interesting. The announcement comes amidst the US tarriff turmoil and in that context, GST could well stand for Great Sense of Timing. It feels like a “Diwali gift” that could lift consumer sentiment and give a fresh push to economic growth.