Editorial 03/03/2026
The waning sheen: On prices, GST rationalization
The editorial “The waning sheen: On prices, GST rationalisation” discusses how the initial positive impact of GST rate rationalisation on prices and consumption is beginning to fade, and it evaluates the broader economic implications.
Background: GST Rationalisation
GST rationalisation means simplifying and restructuring tax slabs to make the system easier and more efficient.
India earlier had multiple slabs (0%, 5%, 12%, 18%, 28%). The government moved toward a simpler structure mainly around 5% and 18% with a higher slab for luxury/sin goods.
Objectives of this reform:
- Simplify the tax structure
- Reduce compliance burden
- Lower prices for many goods
- Boost consumption and economic growth
Initial Positive Effects
After the rationalisation:
- Many everyday goods saw tax reductions.
- Consumer sentiment improved, especially before the festive season.
- GST collections increased, indicating stronger economic activity.
For example, gross GST revenue reached about ₹1.83 lakh crore in February, showing an 8.1% year-on-year increase.
This suggested that lower taxes could stimulate demand and maintain revenue through higher consumption.
Why the “Sheen” Is Waning
The positive impact on prices may not last long due to several economic factors.
(a) Rising Import Costs
Import-related GST collections have increased significantly.
- Import IGST rose 17% year-on-year to around ₹47,800 crore.
Higher import costs can push domestic prices upward, offsetting tax cuts.
(b) Depreciation of the Rupee
The rupee weakened by about 4% against the US dollar.
Effects:
- Imported goods become costlier
- Production costs increase
- Price relief from GST cuts diminishes
(c) Global Economic Pressures
Global factors such as:
- Higher commodity prices
- Trade disruptions
- Supply chain issues
can increase inflation, making tax reductions less effective in lowering prices.
Structural Concerns About GST
1. Limited Price Pass-Through
- Issue: When GST rates are reduced, businesses do not always lower prices proportionally.
- Impact: Consumers may not get the full benefit of tax cuts.
- Reason: Firms may retain part of the reduction to maintain profit margins or offset rising input costs.
2. Revenue Dependence
- Issue: Both the Central and State governments depend heavily on GST revenue.
- Impact: Any further reduction in GST rates can create a fiscal strain, limiting the scope for sustained tax cuts.
- Concern: States especially may resist further rate cuts as they could impact their budgets.
3. Complexity Despite Rationalisation
- Issue: Even after rationalisation, GST has multiple slabs (5%, 12%, 18%, 28%), plus cess on luxury/sin goods.
- Impact: Compliance burden remains high for businesses, especially small and medium enterprises (SMEs).
- Reason: Frequent changes in slabs and exemptions create confusion.
4. Refund and Compliance Challenges
- Issue: Input Tax Credit (ITC) system is complicated, and delays in refunds can create cash-flow problems.
- Impact: Affects manufacturers and exporters, discouraging investment.
5. Limited Integration Across States
- Issue: GST aims for a unified national market, but state-level enforcement and interpretations vary.
- Impact: Businesses face differing procedures, audits, and enforcement practices, reducing efficiency.
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