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What GST rationalisation says about about Modi government's intent on reforms

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GST Rationalisation and the Modi Government’s Reform Agenda: A Comprehensive Overview

In 2021, India undertook one of the most ambitious tax reforms in recent history, overhauling the Goods and Services Tax (GST) structure and streamlining a complex web of levies that had plagued businesses and consumers alike. The article “What GST rationalisation says about Modi government’s intent on reforms” (The Print) traces the journey from the initial convoluted regime to the current simplified tax framework, while probing the deeper political and economic motives behind the shift. Below is a concise yet detailed recap of that piece, enriched with insights drawn from the linked sources and the wider context of the Modi administration’s reformist drive.


1. From Chaos to Consolidation: The Genesis of GST Rationalisation

GST, launched in 2017, replaced a labyrinth of indirect taxes—state VAT, central excise, service tax, and many others. The original design included eight tax slabs (0%, 5%, 12%, 18%, 28%, 3%, 6%, and 12% for certain essential items) and a separate “compensatory” tax of 3% on “tax-eligible” items like food grains. While the intent was to create a unified market, the proliferation of rates and the frequent changes caused significant compliance burdens, especially for small and medium enterprises (SMEs).

The article notes that the rationalisation was prompted by both domestic complaints and international pressure to align India’s tax regime with global best practices. It highlights the role of the GST Council—a constitutional body chaired by the Union Finance Minister and including state finance ministers—in steering the reforms.


2. Key Provisions of the 2021 Rationalisation

The 2021 rationalisation, announced in the Union Budget 2021–22, delivered several decisive changes:

Original CategoryNew CategoryRationale
8 Tax Slabs5 Tax Slabs (0%, 5%, 12%, 18%, 28%)Reduce complexity
Compensatory 3% TaxRemovedSimplify rate structure
“Compensatory” tax on food grainsIntegrated into 0% and 5% slabsEnsure food security while eliminating an extra layer
“Essential” and “Non-essential” classificationMergedAlign with global definitions
Input tax credit thresholdsReducedEncourage compliance

The article stresses that the removal of the 3% compensatory tax and the consolidation into five clear slabs were the most visible outcomes, directly cutting down the administrative load for taxpayers.


3. Political Context: Modi Government’s Reform Blueprint

The rationalisation was framed as a “coup de grace” for the Modi government’s broader economic agenda. The article highlights how this move dovetails with other policy initiatives:

  • Inclusion of SMEs: By simplifying the tax regime, the administration aimed to reduce the cost of doing business for over 12 million SMEs, which constitute more than 50% of India’s manufacturing output.

  • Digitalization of Tax Administration: GST was a cornerstone of the “Digital India” thrust. Rationalisation facilitated better integration of the GST portal with other e-governance platforms.

  • Economic Growth and Global Competitiveness: By aligning India’s tax structure with the OECD and the World Bank’s recommendations, the Modi government sought to attract foreign direct investment (FDI) and improve the Ease of Doing Business rankings.

The article quotes finance minister Nirmala Sitharaman’s statements in the Lok Sabha, where she said the rationalisation “will make India’s tax regime world‑class and create a more business-friendly environment.” The writer points out that such rhetoric aligns with the government’s long‑term objective of positioning India as a “global production hub.”


4. Economic Impact: Quantifying the Gains

According to the Economic Survey 2021, the rationalisation is expected to:

  • Increase Compliance: By reducing the number of tax slabs, tax authorities can focus on enforcement rather than administrative overhead.
  • Boost Consumption: Lower GST rates on essential goods will reduce the cost of living, potentially increasing consumer spending.
  • Stimulate Production: SMEs will face lower tax rates and fewer compliance obligations, encouraging production growth.

The article cites a report by the Center for Monitoring Indian Economy (CMIE) that estimates a potential uplift of 0.5–0.7% in GDP by 2025, attributing a significant share of this growth to the simplification of the tax regime.


5. Criticisms and Unresolved Issues

Despite the overall positive reception, the article does not shy away from the criticisms. Some economists argue that the rationalisation primarily benefits the manufacturing sector and large firms, while agriculture and informal trade may still face a tax burden. The retention of the 28% slab on luxury goods has been a point of contention, especially in the context of a broader “tax equity” debate.

Moreover, the article points out that while the number of tax slabs reduced, the overall compliance infrastructure remains under strain. States still grapple with limited digital resources, and the GST Council has yet to address the “reverse charge” mechanism’s complexity.


6. The Bigger Picture: Reforming India’s Taxation Engine

The rationalisation, as the article concludes, represents more than a technical tweak—it is a symbolic signal that the Modi government is committed to systemic reforms. The move is seen as a test case for other potential reforms such as the introduction of a new income tax threshold, simplification of the Central GST (CGST) and State GST (SGST) ledger, and better coordination with state tax authorities.

In a world where emerging economies are constantly racing to attract investment and streamline governance, the GST rationalisation serves as a case study in balancing political ambition with practical administrative change. As the government continues to roll out complementary reforms—such as digitizing the e‑commerce tax regime and enhancing the ‘one‑stop shop’ for foreign investors—the rationalised GST framework will likely act as the bedrock for these initiatives.


In Summary

The article from The Print deftly maps the evolution of India’s GST landscape, situating the 2021 rationalisation within the Modi government’s broader reform agenda. By trimming excess complexity, lowering rates for essential goods, and aligning with global standards, the administration signals its intent to create a more inclusive, business‑friendly economy. The next few years will test whether these structural changes translate into sustained growth, improved compliance, and a more equitable tax system for all stakeholders.


Read the Full ThePrint Article at:
[ https://theprint.in/theprint-on-camera/what-gst-rationalisation-says-about-about-modi-governments-intent-on-reforms/2737986/ ]