'India's income levels don't justify single rate yet': Tax expert hails two-slab GST

Tax experts and policymakers are weighing in on the Goods and Services Tax (GST) reforms cleared by the Council, with Ajay Rotti, founder of Tax Compass, cautioning against rushing towards a single nationwide rate.

"Unpopular opinion: We are not ready for a single rate. We cannot have a regressive structure. Poorer households spend a higher share of income on consumption and their goods need to be lower rate," Rotti posted on X, a day after the GST Council collapsed four slabs into a simplified dual structure of 5% and 18%, with a 40% rate reserved for luxury and sin goods.

He stressed that, despite the push by some economists, India's income levels and compliance base do not justify a uniform rate yet. "While 12-14% or whatever that may be is simpler to administer...It is not for our income levels nor for our level of compliance. If our base expands and compliance improves may be. We still need revenues. GST is a major contributor. We cannot tax essentials at 10%...so that 5% is needed. Once that is needed...we need 40% for certain ‘luxury’ goods,” Rotti explained.

Hailing the new two-tier system as the "closest we can get to a single rate," he added. "I think we have done fabulously well today. As compliance improves… we become a richer nation… who knows… we may see a single rate. But that cannot be now."

Clash of visions on GST's future

Earlier, a report from the Think Change Forum argued that the long-term success of GST lies in converging towards a single rate. "Creating a 40% slab, even for a narrow set of sin or luxury goods, will set a precedent for creeping expansion. Over time, more items will be drawn into this category, undermining the very purpose of simplification,” the report warned.

Former Planning Commission deputy chairman Montek Singh Ahluwalia also weighed in, telling India Today TV that GST, while a "huge positive," has not yet lived up to its promise. His prescription: a single nationwide rate of 14%. "If you wanted a single rate, probably what you should have done is have a 14 per cent rate — six per cent for the Centre, six per cent for the states, and two per cent for urban local bodies. That would be a real reform. Urban bodies lost revenue when Octroi was abolished, and this would give them their due," Ahluwalia said.

The Council's decision

The Council’s decision, announced by Finance Minister Nirmala Sitharaman after a marathon meeting, slashed GST on hundreds of items from hair oil and toothpaste to televisions and tractors, while fully exempting health and life insurance.

Sitharaman said the reforms were "focused on the common man" and would ease costs for households, boost consumption, and support manufacturers facing headwinds from the US’s 50% tariffs on Indian exports.

Economists estimate the Rs 48,000 crore fiscal impact of the rate cuts is manageable, and that higher consumption could add up to 0.5 percentage points to GDP growth by 2026, offsetting much of the external shock.