GST Reform: Rationalisation or Admission of Failure?

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From 0% GST on insurance to 40% on sin goods, the government finally tweaks its most controversial tax regime—but critics say the move is eight years late

By S JHA

MUMBAI, September 4, 2025 — When the GST Council unveiled its “Next-Gen GST Reform”, the government painted it as a historic Diwali gift for households, farmers, and small businesses. Prime Minister Narendra Modi celebrated it as the fulfilment of his Independence Day promise—a rationalised, broad-based GST system that lowers rates on essentials, insurances, and automobiles, while tightening the noose on luxury and sin goods.

But behind the cheerleading lies an uncomfortable truth: this reform is also an admission that India has lived eight years under a badly designed GST.

The Big Numbers: 0%, 5%, 18%, 40%

0% GST: All life and health insurance policies (term, ULIP, family, senior citizen)—a long-pending demand finally met.
5% GST: Man-made fibre & yarn, fertiliser inputs, renewable energy devices—sectors critical for farmers and green growth.
18% GST: Small cars, bikes (up to 350cc), three-wheelers, buses, trucks, ambulances, all auto parts.
40% GST: Luxury and sin goods—big cars, bikes above 350cc, aircraft, yachts, tobacco, pan masala, gutka, sugary and aerated drinks like Pepsi and Coca-Cola.

This 2-tier system is hailed by reformists as a move away from India’s “socialist hangover” of irrational, fragmented tax rates.

Opposition: Too Little, Too Late

Congress leader P. Chidambaram minced no words: “The GST rationalisation is WELCOME but eight years TOO LATE. The design and rates imposed in 2017 should never have been forced upon the economy. We warned, but the government ignored us. Now, why the sudden change? Sluggish growth? Falling household savings? Bihar elections? Or even Trump’s tariff shocks?”

His charge strikes at the heart of Modi’s GST narrative: if the system was flawed, why did the government allow businesses, consumers, and states to suffer for nearly a decade?

Investors & Economists: A Different Take

Market voices like Pratim Ranjan Bose see the reforms as a welcome modernisation: “No more different GST rates for popcorn and caramelised popcorn. The government finally admits that a 350cc motorbike is the new middle-class aspiration. We may have left the socialist baggage behind.”

This view echoes a market-friendly reading—GST is being reshaped not for ideology, but for consumption trends.

Political Economy: The Unspoken Drivers

The timing cannot be ignored. India faces:

Rising household debt
Falling household savings
Sluggish consumption in urban markets
An election in Bihar—where high fuel, food, and insurance costs bite into voter sentiment

The Modi government’s GST reset, then, is less about “ease of living” and more about electoral survival and economic firefighting.

A Reform or an Apology?

The ruling narrative calls this the “Next-Gen GST.” But in truth, it is a course correction—a belated admission that the GST regime of 2017 was a costly mistake. Businesses shut down, MSMEs choked, states fought bitterly with the Centre, and consumers bore the brunt of high indirect taxes.

If this new GST structure works, it will provide relief. But the larger question remains: why did it take eight years for the government to listen?

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