Why in news?

S&P Global Ratings noted that the proposed two-tier GST structure could reduce the effective taxation rate while boosting long-term fiscal revenues.

The Centre’s proposal, to be discussed with states in an upcoming meeting, aims to simplify GST by reducing the slabs to just 5% and 18%, along with a special 40% rate for select luxury or sin goods.

This reform is expected to streamline compliance, reduce complexity, and potentially increase government revenues over time, though its short-term impact on collections and affordability remains to be seen.

What’s in Today’s Article?

• The Proposed Two-Slab GST System
• S&P’s Position on GST Reform
• Economists’ Perspective on Fiscal Impact

The Proposed Two-Slab GST System

• The central government plans to move from the current four-rate GST structure to two slabs of 5% and 18%, with an additional 40% rate for sin and demerit goods.
  • Currently, there are 4 slabs under GST( 5, 12, 18 and 28%) and the taxation system has been an important component of the government's revenues.
• This reform is expected by the end of 2025 and aims to simplify compliance while reducing distortions in the indirect tax regime.
• The changes will reduce classification disputes, scope for litigation and evasion as well as remove duty inversion.
• Declining Effective GST Rates
  • Since its launch in 2017, GST rates have been gradually reduced.
  • An RBI study in 2019 found that the weighted average GST rate had dropped from 14.4% to 11.6%, achieved through base broadening and removing distortions.
  • This trend is expected to continue under the new structure.

S&P’s Position on GST Reform

• S&P Global Ratings has dismissed concerns that the Centre’s proposal to reform the Goods and Services Tax (GST) regime will harm fiscal revenues.
• Director of the organisation explained that while tax rates may appear lower under the proposed two-slab system, simplified implementation and transparent accounting could actually improve revenue collection in the long run.
• It highlighted that GST has been a key driver of fiscal revenues over the past five to six years.
• S&P believes reforms will continue strengthening government finances rather than weakening them, even if short-term adjustments create some pressure.
• Debt and Fiscal Targets
  • S&P forecasts the combined central and state fiscal deficit at 7.3% of GDP in 2025–26, narrowing to 6.6% by 2028–29.
  • Interest servicing remains a heavy burden but should ease gradually due to stronger revenues and cheaper financing.
  • India’s debt-to-GDP ratio is projected to fall from 83% in 2024–25 to 78% by 2028–29, with the Centre targeting 49–51% by 2030–31.
• Rating Upgrade and Long-Term Outlook
  • S&P upgraded India’s rating to BBB from BBB-, citing its robust economic performance.
  • The agency stressed that India’s reforms, including GST rationalisation, support long-term fiscal sustainability despite short-term uncertainties.
  • It upgraded India’s rating to BBB from BBB- citing:
    • Strong and resilient economic expansion.
    • Political commitment to fiscal discipline.
    • Improved quality of government spending through higher capital expenditure.
    • A credible monetary policy framework ensuring controlled inflation.

Economists’ Perspective on Fiscal Impact

• Economists note that state governments could face revenue losses estimated at ₹7,000–9,000 crore annually.
• However, these may be offset by stronger GDP growth, which boosts both direct and indirect tax collection.
• For 2025–26, the central government’s fiscal deficit impact is expected to be less than 0.1% of GDP.