Union Finance Minister Nirmala Sitharaman has clarified that the recent rationalisation of GST slabs, reducing them to two and exempting essential items like premiums for health and life insurance was 18 months in the making and not a knee-jerk reaction to US tariff hikes.
Speaking at an event on Tuesday, FM Sitharaman dismissed speculation that the reforms were designed to counter the impact of former US President Donald Trump's announcement of tariffs as high as 50%, which could affect Indian exports by an estimated USD 48 billion.
"The GST framework overhaul was discussed well before last year's Union Budget. The Prime Minister had reminded me about relief for the aam aadmi and we had been working on a worthy set of proposals to present," FM Sitharaman said.
Consensus from the States
The Finance Minister highlighted that the first step was to build consensus with state governments. A crucial GST Council meeting scheduled for September 3 and 4 was expected to be contentious, as several states had flagged concerns about potential revenue losses and even proposed an additional 'sin tax'.
However, Sitharaman revealed the meeting ended ahead of schedule, with a unanimous decision to move forward on rationalisation.
"To be fair to state finance ministers, they were on board with rate rationalisation," she said.
No Compensation Since 2022
Addressing concerns about state revenues, Sitharaman noted that there has been no compensation payout since 2022 under the GST Compensation Cess mechanism. The money collected now goes toward repaying loans availed during the COVID-19 pandemic by states and union territories.
On strengthening collections, she stressed:
"The way forward is to improve collection efficiency, which will in turn improve overall revenues. It is not as if the Centre is sitting with a huge suitcase to pay everyone."
Relief for the Middle Class
The minister also linked the reforms to the government's broader tax relief measures for the middle class. In her eighth consecutive Union Budget, relief was extended to salaried taxpayers, with rebates for incomes up to Rs 12 lakh. The new GST rationalisation builds on that effort, she said, making the system simpler while keeping affordability in focus.
The overhaul is being seen as one of the most significant tax reforms since the introduction of GST in 2017, aimed at addressing criticisms of complexity and high compliance burden.
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