India’s GST Reforms: A Diwali Gift to Simplify Taxes and Boost Growth

On August 15, 2025, as he delivered his Independence Day address, Prime Minister Narendra Modi announced a new GST (Goods and Services Tax) regime in India, calling it a “gift“ for the nation, and on Diwali. The Finance Ministry has proposed sweeping changes to transform the current GST regime, lessen tax liability on citizens and promote the ease of doing business. The next-generation GST reforms were referred to the Group of Ministers (GoM) of the GST Council to create a new tax system for India by Diwali 2025. Let’s take an in-depth look at the changes proposed and their ramifications on businesses, consumers and the economy.

A New Era for GST: Key Proposed Reforms

On July 1, 2017, the Goods and Services Tax (GST) was implemented across 29 states and 7 Union territories in India (and subsequently Jammu and Kashmir), to combine, harmonize, and vastly simplify India’s extremely complicated tax landscape, benefiting millions of consumers, farmers, and businesses. In a comprehensive proposal to the GST Council, the Finance Ministry has since put forth recommendations to amend GST using three pillars: structural reforms; rate rationalization, and ease of living. These recommended changes to GST are aimed to simplify, improve transparency, and create better inclusivity for the Indian tax landscape, aligned with the vision of an Atmanirbhar Bharat.

1. Structural Reforms for Stability and Clarity

• Addressing Inverted Duty Structure: The reforms target inverted duty structures between input and output tax rates, which will mainly benefit sectors like textiles, in order to increase their competitiveness and limit their input tax credit accumulation
• Resolving Classification Disputes: The proposal anticipates less disputes by proposing to simplify and harmonize the rate structures, also making compliance easier.
• Long-Term Certainty: A stable tax environment will allow businesses to plan better, improving certainty and investment.

2. Rate Rationalization: Fewer Slabs, Lower Taxes

The existing GST regime with multiple slabs (0% / 5% / 12% / 18% / 28% and special rates for precious metals) will be significantly simplified. The Finance Ministry plans to reduce it to just two basic slabs:

• A standard rate of (most likely 5%) for important goods
• A merit rate of (most likely 18%) for the rest of the goods and services
• For tax on sin and demerit goods, such as tobacco, pan masala and online gaming, a special rate of 40% would be applied.

Key highlights:

• 99% of items in the 12% slab are expected to move to the 5% slab.
• 90% of goods and/or services that attract 28% slab will move to 18% slab.
• Gems, jewelry, gold (including gold jewelry), and diamonds (both 0.25% and 3%) will continue to remain unchanged. 
• Essentials and aspirational goods, such as refrigerators (fridges), air conditioners (ACs), packaged foods (including butter, cheese, and fruit juices), and medical goods (such as diagnostic kits, medical oxygen), will see lower rates under Goods and Services Tax to enhance affordability and increase consumption.

The end of the compensation cess (previously used to offset state revenue losses) has created fiscal space, enabling these rate reductions. The cess, ranging from 1% to 290% on luxury and sin goods, will be subsumed into the proposed 40% rate for select items.

3. Ease of Living: Simplifying Compliance

The reforms emphasize processes that are easier to use for small businesses, start-ups, and exporters:

• Simplified Registration: Technology-enabled, time-sensitive registration processes will minimize bureaucratic hurdles.
• Pre-filled Returns: Automated pre-filled GST returns will minimize manual errors and discrepancies.
• Faster Refunds: Improved refund processes for exporters and businesses facing inverted–duty structures will address delays and increase confidence.

Prime Minister Modi’s Vision: A Diwali Gift for India

During his address on the occasion of Independence Day from the Red Fort, Prime Minister Modi referred to the GST reforms as his “double Diwali gift” to alleviate the rising cost of living and drive economic growth. He noted the following reforms (which were put together with states) would:

• Reduce Tax on Daily-use Items: A program focused on lowering the cost of essentials for households and small businesses.

• Support MSMEs and Start-ups: Reducing compliance burdens and tax levels so entrepreneurs are able to start their businesses.

• Enhance Inclusive Growth: Further aligned with the Atmanirbhar Bharat vision to support domestic industry and consumption.

Modi noted that GST has been eight years of success for the common man, farmers and the middle class while positioning the reforms as an extension of his governments’ “reform, perform, and transform” narrative. He also urged traders to promote “Swadeshi” products and the role that the reforms will play in moving towards a self-reliant economy.

The Road Ahead: Challenges and Opportunities

The GST Council hopes to take the final decisions in September 2025 with a view to introduce them leading into Diwali (October 2025). There are still hurdles to overcome: 

•  Revenue considerations: As 70-75% of GST revenue in 2023-24 would still be coming from the 18% slab, and the rate reduction could incur short-term revenue losses, which might provoke resistance from states. In the spirit of cooperative federalism, the Finance Ministry is collaborating with the states to address these issues. 
• Getting consensus: Past attempts at rate rationalization, like a rate reduction on health insurance premiums under GST, had to be delayed due to the disagreement of some states. The dates of the GST Council meetings will be important for dialogue and discussions with stakeholders. 

Although there are challenges, experts are optimistic that a simpler GST will be supportive of getting the GST base expanded and support increased consumption, through increased economic activity (and in accordance with the Laffer curve) eventually off-setting revenue losses. Along with compliance being easier because of a simpler GST, there should be fewer disputes about interpretation, which could enhance ease of doing business. This easing could benefit India’s more budding entrepreneurial ecosystem.

Why It Matters for Growth

The reforms present opportunities for business in the form of a more predictable tax regime, cost reductions in compliance and improved competitiveness for the business sector. For consumers, lower taxes on essentials and aspirational purchases will lessen their cost of living and increase demand. For the economy, it shows India‘s commitment to inclusive growth and large-scale innovation leading to the Indian centre for the facilitation of inclusive growth – an investment destination. 

With India proudly celebrating its economic journey, the advent of GST marks a significant transformation towards a simpler and more equitable tax regime in India. By Diwali 2025, expect India’s journey to herald a new economic world order that will propel her into a prosperous and self-sufficient society.