GST Rate Rationalisation: Why is GST Rationalisation Essential?

The primary aim of the Goods and Services Tax in India was to remove complexities from the highly fragmented indirect tax system that prevailed in the country before 2017 and build India as 'one nation, one market'. However, the GST Act has replaced one set of complications with another.

This article discusses GST rate rationalisation, why it is necessary and the hurdles the GST Council faces in rationalising GST rates. Stay with us.

Key Takeaways

1. The most awaited 56th GST Council meeting happened 3rd September 2025. The council rationalised the GST rate structure from four GST slabs (5%, 12%, 18%, 28%) to a simplified structure:

• Standard rate: 18% - Applicable to most goods and services
• Merit rate: 5% - For essential items and priority sectors
• Demerit rate: 40% - Selective application to sin goods and luxury items

2. GST on individual health & life insurance has been made exempted.

3. GST on dairy products, 33 lifesaving drugs and educational essentials have been brought down to Nil rate.

4. GST on daily essentials, agriculture goods, health care equipment have been brought down to 5%.

5. GST on electronic appliances, small cars and motor cycles (≤350cc) have been brought down to 18%.

6. GST on sin goods such as pan masala, aerated waters, caffeinated beverages, carbonated beverages of fruit drinks / with fruit juice has been increased to 40%.

7. All GST rate changes will be effective from 22nd Sept 2025 except tobacco products. 

GST Rate Rationalisation in 56th GST Council Meeting 

The next gen GST reforms from 56th GST Council meeting represent the most comprehensive GST rate overhaul since the introduction of GST, directly impacting financial strategies, cash flows, and competitive positioning.

GST rate cuts-

GST rate hikes-

* To come into effect at a later date (not from 22nd Sept, 2025) through a notification, after the loan and interest obligations under the compensation cess are discharged. 

Current GST Rate Structure

Currently, GST is applicable in 5 slabs, including 0% or nil tax. They are 0% (Nil tax), 5%, 12%, 18% and 28%. 

Essential commodities primarily belong to 0% and 5% tax slabs, while semi-essential items are taxed at 12% and 18% slabs. Luxury items attract the highest GST rate of 28%. 

Need for GST Rate Rationalisation

GST rate rationalisation is integral to the objective of introducing GST in India, and the reasons are: 

1. Structural simplification of GST rates: GST was introduced with 4 tax slabs, excluding the nil tax (0%). This was much simplified compared to the pre-GST indirect taxation system. However, most countries that successfully implemented GST follow only one or two tax slabs. So, the Indian GST system has a lot of room for improvement.  
2. Review of prevailing GST rates based on consumption pattern: GST is a consumption-driven taxation system, and changing consumption patterns requires regular review and revision of GST rates to keep the system relevant to changing micro and macroeconomic realities. 
3. Reducing the tax burden on essential consumer items: In a democratic country like India, central and state governments control price inflation to reduce the population's burden. GST rate rationalisation helps lower the tax burden on these items. 
4. Minimising compliance burden on traders and manufacturers: Multiple tax slabs for similar items and confusion about interpreting tax implications increase the compliance and audit burden for manufacturers and traders. This also increases operational costs. 
5. Improving voluntary acceptance of GST among taxpayers: Worldwide, a simplified tax structure helps improve taxpayers' acceptance of the taxation system and increases voluntary tax payments. So, GST rate rationalisation is also essential for implementing GST successfully in India. 

The key proposals for GST Rate Rationalisation 

Manufacturers' and traders' bodies and consumer interest protection groups have several proposals to rationalise the prevailing GST rates in India. Some of these key proposals are: 

• Significant reduction or exemption of individual health insurance premium from GST 
• Rationalisation of the gap between GST applicable to EV, Hybrid and Flex-fuel cars
• Merging 12% and 18% slabs to a median rate of 15% so that the number of tax slabs comes down to 3 from the existing four slabs.
• Postponing different tax implications for items of similar categories. For example, when sold loose, jaggery attracts 0% GST, but packed jaggery attracts 5% GST.  
• Getting rid of multiplicity by introducing a single slab GST in a phased manner in line with global GST practices   

Impact of GST Rate Rationalisation

If implemented timely and correctly, GST rate rationalisation will: 

• Improve the 'ease of doing business' for manufacturers and traders in the country. 
• Establish India as 'one nation, one country', removing inter-state obstacles in transferring goods. 
• Reduce compliance burden and cost of compliance for manufacturers and traders. 
• Increase voluntary acceptance of GST among taxpayers.
• Improve GST collection for government exchequers.   

Why is the Rationalisation of GST Rates Complex?

Industry bodies had high expectations from the 53rd GST Council meeting, held on 22nd June 2024, on the rationalisation of GST tax slabs. However, the Council has yet to make conclusive decisions as GST rate rationalisation faces several hurdles. 

• India is a diverse country with different consumption patterns across states, and two-thirds of the voting rights in the GST Council belong to different states. Building a consensus is difficult, especially in an environment of political differences. For example, the Council and the finance ministry intend to bring petroleum products under GST. However, this may cause a loss of tax collection for many states, so those state members in the GST Council oppose such a move.     
• GST rate rationalisation also needs to consider its impact on tax collection. An increase in rates for another must compensate for a reduction in GST rates for one set of items. The options are limited, with most luxury goods already being taxed at the highest GST rate. Besides, it can also fuel inflation.
• GST rate rationalisation can affect inflation and the economic condition of a particular segment of consumers. For example, merging 12% and 18% tax to a median value of 15% will increase the tax burden for items that now attract 12% GST. Balancing such an impact is a difficult task.
• Merging tax slabs or a broad change in GST tax structure requires multiple government agencies to work together for implementation. This is a time-consuming and cost-intensive process.  

Government Initiatives and Stakeholder Consultation

The 54th GST Council Meet took place on 9th September 2024 in New Delhi.The status reports were duly submitted by the Group of Ministers (GoM) formed on rate rationalisation on the basis of which further discussions will be held in upcoming council meetings. However, a few rate changes were recommended by the GST Council such as extruded/expanded savoury food products, cancer drugs and car and motorcycle seats.