PM’s Pledge: GST Cut by Diwali 2025

Promise & Rationale

During a recent address, Prime Minister Modi reaffirmed that a revision of GST rates would be undertaken before Diwali 2025. The announcement signals a clear intent to ease the tax burden on end consumers and stimulate demand, particularly as households prepare for festive purchases.

Key motivations behind the pledge include:

Boosting consumption: With domestic demand still stabilising post-pandemic and amidst global uncertainties, a reduction in tax rates could encourage spending in key sectors like FMCG, electronics, and services.

Taming inflation: High indirect tax rates contribute to elevated prices. By lowering GST on essential and semi-essential goods, the government hopes to reduce inflationary pressures, especially in urban markets.

Improving sentiment: The festive season is critical for retail, auto, and consumer durables. Tax relief could enhance public sentiment and business confidence heading into Q3 and Q4 of FY25-26.

Possible Reform Path

The GST Council is expected to explore multiple reform pathways to deliver on the Prime Minister’s commitment. While final decisions are still pending, some likely measures include:

1. Merging GST Slabs

Currently, India has a multi-tiered GST structure (0%, 5%, 12%, 18%, and 28%). There is growing consensus that simplifying these into fewer slabs will reduce confusion and compliance burdens. For instance:

Goods taxed at 12% may be shifted downward to 5%.

A merging of 12% and 18% into a single mid-level slab could also be considered.

2. Rationalisation & Standardisation

To create a more consistent and transparent GST regime:

The government may remove select exemptions, especially those creating distortions.

A push for standardising the tax base across states and sectors will be made to avoid cascading tax effects.

Rate rationalisation is expected to align more closely with value-addition principles.

3. Digital Compliance & Simplification

Continued improvements to the digital GST ecosystem will be essential for both businesses and the tax administration:

Introduction of simplified return forms and auto-populated data to ease filing.

Enhancements to input tax credit (ITC) systems, enabling better tracking and quicker reconciliation.

Focus on integrating compliance for MSMEs and informal sector participants into the GST net through simplified digital tools.

Fiscal Risks

While the GST cut may provide short-term economic benefits, it also introduces significant fiscal and operational challenges that policymakers must weigh carefully.

1. Revenue Loss

Lowering GST rates inevitably leads to immediate revenue shortfalls. Preliminary estimates suggest the government could face a hit of ₹50,000–₹70,000 crore, or potentially more, depending on the scale of the cuts and affected sectors.

This is particularly concerning at a time when government spending on welfare, infrastructure, and defence is on the rise.

2. Fiscal Deficit Pressure

With a commitment to keeping the fiscal deficit under control, the Centre may be forced to offset revenue losses by:

Cutting back on discretionary expenditures.

Boosting non-tax revenues (e.g., asset monetisation, PSU dividends).

Relying more heavily on borrowing, which could have downstream effects on interest rates and debt sustainability.

3. Implementation Lag & Transition Issues

Tax reform is rarely seamless:

Any slab restructuring would require extensive systems and software updates across businesses, point-of-sale systems, and invoicing platforms.

Delays and errors during the transition could cause compliance issues, inventory mismatches, and legal disputes.

Small businesses may particularly struggle with the changeover in pricing and reporting requirements.

Conclusion

Prime Minister Modi’s Diwali GST pledge comes at a strategically important time for both the economy and political landscape. While the proposed reforms could deliver a much-needed boost to consumption and economic morale, the success of the initiative will hinge on how the changes are structured, phased, and absorbed across the system. As the festive season approaches, all eyes will be on the GST Council’s decisions, and on how the government balances its populist intent with long-term fiscal prudence.