Why India's GST began with so many slabs and why it's being simplified now
New Delhi, Sep 4, 2025
The GST Council has cut slabs from five to two, aiming to reduce compliance costs, simplify taxation, and align India's indirect tax regime with global practice
The government has finally unveiled a reformed taxation structure for the country. On September 3, the Goods and Services Tax (GST) Council announced comprehensive rejigging of the GST structure, aimed to boost consumption and provide relief to the Indian consumers and businesses. The new structure has reduced the GST bracket to only two (5 per cent and 18 per cent), besides a 40 per cent 'sin tax' for select goods, from the earlier more complicated five slabs (0, 5, 12, 18, and 28 per cent).
The simplified structure has garnered cheer from across industries who are betting their hopes on improved consumption among the working classes in the country. With the festive season right around the corner, India Inc is hopeful to see an uptick in sales.
But, with this simplification has arrived a pertinent question. GST, when introduced in July 2017, was pitted as a ‘one nation, one tax’ scheme. So, why was it originally so complicated and what has changed now which has forced the government to introduce changes?
What was India’s GST design in 2017?
When the GST scheme was announced on July 1, 2017 by Prime Minister Narendra Modi, India adopted a dual structure (Central GST + State GST for intra-state sales, and IGST for inter-state sales) with multiple rates of 0, 5, 12, 18 and 28 per cent, plus a compensation cess on select 'sin' goods.
The government reasoned that it was done to keep the reform revenue-neutral, protect essentials for low-income households, and align new rates with the pre-GST tax burden on each product (the 'fitment' exercise). This approach was a compromise in a federal system and sought to avoid a sharp spike in inflation.
Essential goods and services used by the wider population were taxed at lower rates to avoid burdening poor and middle-class consumers, while luxury or 'sin' goods attracted higher rates to discourage consumption and generate additional revenue for the government.
Economists had argued that India’s economy being heterogeneous, with consumption patterns ranging from subsistence to luxury across regions and income groups, it was the need of the hour for policymakers to safeguard affordable access to essentials while permitting higher taxation on luxury and socially undesirable items.
But, while the multi-slab approach made GST 'progressive', it complicated tax administration and compliance.
How the push to simplify GST gathered steam
The GST Council has argued that multiple rates complicated classification, raised compliance costs, and spurred disputes. Over time, the Council has consolidated rates and tweaked procedures, and this year it approved a broader simplification package. The central government has framed these as “next-generation” reforms aimed at ease of doing business and ease of living.
Additionally, eight years of data showed that the 18 per cent and 5 per cent slabs accounted for almost three-fourths of all GST revenue, while the 12 per cent slab generated insignificant returns and the 28 per cent slab discouraged middle-class consumption of many “aspirational” goods, according to an NDTV report.
The move is designed to make goods and services cheaper for the common person, leaving more disposable income and stimulating demand, which is expected to boost the economy and offset nominal revenue loss.
The new rates will come into effect from September 22 this year, while tobacco and other listed items retain existing levies until compensation-cess obligations are cleared.
Is India’s GST now closer to global practice?
Many countries run VAT/GST with a single standard rate and few exemptions. New Zealand, for example, has a nationwide GST at 15 per cent with minimal concessions. Meanwhile, an OECD report notes that systems vary widely but reduced rates and exemptions increase complexity. India’s earlier structure, with several non-zero rates and many exclusions, was on the complex end by international comparison. The new two-slab move narrows that gap, though India still operates a dual (central-state) GST unlike unitary systems.
[The Business Standard]
