In Graphics: How GST cuts triggered a rally for Indian businesses

Government analysis of the September 2025 GST rate rationalisation reveals a significant expansion of the indirect tax base in the second half of FY2025-26, ...

What Happened

Government analysis of the September 2025 GST rate rationalisation reveals a significant expansion of the indirect tax base in the second half of FY2025-26, validating the "lower rates, wider base" approach.
Average monthly taxable supply grew by 22.5% in the latter half of FY26 compared to the pre-reform period, indicating that businesses previously operating outside or at the margins of GST compliance moved into the formal tax net.
Higher volumes of taxable supplies more than compensated for the reduced headline rates — total GST collections for FY2025-26 reached ₹22,27,096 crore, up 8.3% year-on-year, with the average monthly collection at approximately ₹1,85,591 crore.
The 56th GST Council meeting (3 September 2025) approved the simplified dual-slab structure (5% and 18%), effective 22 September 2025, replacing the erstwhile four-slab system (5%, 12%, 18%, 28%).
Essential goods — including processed foods, garments, footwear, and construction materials — were shifted from the 12% to the 5% slab, directly benefiting households.
A new 40% rate on sin and luxury goods (tobacco, aerated drinks, high-end automobiles, private aircraft, yachts) replaced the earlier 28% peak slab, maintaining progressive revenue capture at the top end.

Static Topic Bridges

GST Structure in India: CGST, SGST, and IGST

India follows a dual GST model — both the Union and the States levy taxes on goods and services simultaneously. The architecture has three components:

CGST (Central GST): Levied by the Central Government on intra-state transactions.
SGST (State GST): Levied by the State Government on intra-state transactions; revenue stays entirely with the state.
IGST (Integrated GST): Levied by the Centre on inter-state transactions and imports; the Centre then distributes the state's portion.

For every intra-state transaction, CGST and SGST are levied at equal rates, splitting the total tax equally between Centre and State. GST replaced over 17 indirect taxes (Excise, VAT, Service Tax, CST, etc.), eliminating the cascading "tax on tax" effect.

Introduced on 1 July 2017, under the 101st Constitutional Amendment Act, 2016.
Pre-reform taxpayer base: 66.5 lakh (2017); post-reform base: 1.51 crore (2025) — a 127% increase.
Total taxpayers brought into the formal economy reflects deepening fiscal formalisation.

Connection to this news: The 22.5% surge in taxable supply directly reflects more businesses and transactions entering the CGST/SGST/IGST net as compliance costs reduced and rate simplification removed perverse incentives to evade.

GST Rate Rationalisation: The Dual-Slab Reform

GST rate rationalisation refers to the periodic restructuring of the slab system by the GST Council to balance revenue adequacy, compliance ease, and equity. The September 2025 reform is the most significant overhaul since GST's 2017 launch.

Old structure: Four standard slabs — 0%, 5%, 12%, 18%, 28% — plus a cess on top of 28%.
New structure: Two standard slabs — 5% and 18% — plus 40% on sin/luxury goods.
The 12% slab was abolished; most goods in it moved to 5%.
GST collections in March 2026 reached ₹2,00,064 crore (first time crossing ₹2 lakh crore), a year-on-year growth of 8.8%.
Households expected to gain spending power equivalent to 0.7%–0.8% of GDP in FY2025-26; reform reduces inflation by approximately 1.1 percentage points.

Connection to this news: The rate rationalisation is the direct policy trigger for the 22.5% expansion in taxable supply — lower rates attracted previously non-compliant businesses into the system and boosted formal consumption.

The Laffer Curve: Why Lower Rates Can Yield Higher Revenue

The Laffer Curve, conceptualised by economist Arthur Laffer, illustrates the relationship between tax rates and government tax revenue. It demonstrates that both a 0% rate and a 100% rate generate zero revenue; between these extremes, there is an optimal rate that maximises revenue.

At excessive tax rates, evasion rises, economic activity shrinks, and the tax base contracts — revenue falls despite the high rate.
At moderate or reduced rates, compliance improves, more economic agents participate formally, and the broader base generates equal or higher revenue.
India's pre-2017 indirect tax system was a classic example of the left side of the curve — multiple taxes and cascading effects inflated effective rates and incentivised informality.
Post-GST, the progressive reduction in rates (particularly the elimination of the 12% slab) mirrors the Laffer logic: formalisation, not the rate, drives revenue.

Connection to this news: The 22.5% expansion in taxable supply with 8.3% growth in total GST collections despite lower rates is India's empirical validation of the Laffer Curve in an indirect tax context.

GST Council: Constitutional Basis, Composition, and Voting

The GST Council is the apex federal body governing GST policy. Established under Article 279A of the Constitution (inserted by the 101st Constitutional Amendment Act, 2016), it ensures cooperative federalism in indirect tax governance.

Chair: Union Finance Minister.
Members: Union Minister of State for Finance or Revenue; Finance/Taxation Ministers of all States and Union Territories with legislatures.
Vote weightage: Centre holds one-third of total votes; all States together hold two-thirds.
Decision threshold: Three-fourths majority required for any decision (i.e., 75% weighted votes) — ensures Centre and States must cooperate.
Quorum: At least 50% of total members must be present.
The Council recommends rates, exemptions, threshold limits, and dispute resolution mechanisms; Parliament and State legislatures then legislate accordingly.

Connection to this news: The 56th GST Council meeting (3 September 2025) was the forum at which the dual-slab rate rationalisation was approved, demonstrating the Council's central role in India's cooperative tax federalism.

Fiscal Federalism and GST

Fiscal federalism refers to the division of taxing and spending powers between different levels of government. GST transformed India's fiscal federalism by creating a shared revenue pool governed jointly by the Centre and States.

Pre-GST, States had independent VAT rates; the Centre had Excise and Service Tax — fragmented and inefficient.
GST unified the market but required States to cede their tax autonomy in exchange for a constitutionally guaranteed revenue share.
The original GST Compensation Cess (2017–2022) protected States against revenue shortfall for five years post-rollout.
After the cess period ended in 2022, States bear the full risk of their SGST collections — making rate rationalisation a contested federal decision, not a unilateral Centre move.
IGST sharing between Centre and States remains a source of contention; undistributed IGST (on imports, in particular) has declined from over 30% in FY18 to 17.4% in FY22, affecting State finances.

Connection to this news: The 22.5% expansion in taxable supply benefits both Centre (CGST) and States (SGST) proportionally — the reform demonstrates that well-designed rate rationalisation is not a zero-sum fiscal federal bargain.

Key Facts & Data

GST launch date: 1 July 2017 (midnight, Parliament's Central Hall).
Constitutional basis: Article 279A, inserted by the 101st Constitutional Amendment Act, 2016.
56th GST Council meeting date: 3 September 2025.
New rate structure effective: 22 September 2025.
Pre-reform slabs: 0%, 5%, 12%, 18%, 28% (+ cess on 28% goods).
Post-reform slabs: 0%, 5%, 18%, 40% (sin/luxury goods).
Taxable supply growth (H2 FY26 vs. pre-reform): +22.5%.
FY2025-26 gross GST collection: ₹22,27,096 crore (+8.3% YoY).
Average monthly GST collection FY26: ~₹1,85,591 crore.
March 2026 collection: ₹2,00,064 crore (first month crossing ₹2 lakh crore mark).
Taxpayer base growth: 66.5 lakh (2017) → 1.51 crore (2025).
Household GDP benefit: +0.7%–0.8% of GDP in FY26 spending power.
Inflation impact: ~1.1 percentage point reduction from the rate cuts.
GST Council voting: Centre = 1/3 vote weight; States = 2/3; decisions need 3/4 majority.