Should India simplify its tax system, even at the cost of trade-offs?

India's tax system, especially the Goods and Services Tax (GST), has long been criticised for having too many rates and exemptions, making compliance costly and disputes common. The GST Council, the central-state body that sets GST policy, approved a major rate rationalisation in September 2025, cutting the main slab structure from four widely used rates down to two. The remaining question is whether further simplification is worth the revenue and political trade-offs involved.

GST was introduced in July 2017, replacing a patchwork of central and state indirect taxes with a single nationwide tax, but one split across multiple slabs (0%, 5%, 12%, 18%, and 28%) to keep essential goods cheap and tax luxury items more. Businesses and economists argued for years that this complexity raised compliance costs and created classification disputes, for example over which rate a particular snack or service should attract.

The GST Council approved a rationalisation of rates in its meeting on 3 September 2025, effective from 22 September 2025. The reform collapsed the structure to two principal slabs, 5% for essential goods and services and 18% as the standard rate, eliminated the 12% and 28% slabs, and introduced a 40% 'de-merit' rate reserved for luxury and socially harmful goods such as tobacco, aerated drinks, and high-end vehicles.

• Fewer rates mean fewer classification disputes and lower compliance costs, especially for small businesses that cannot afford extensive tax advisory support.
• A simpler system is harder to game through artificial product reclassification to access lower rates.
• Predictable, simple taxation is generally associated with higher voluntary compliance and a broader tax base over time.

• Multiple rates let policymakers protect low-income consumers by taxing essentials lightly while taxing luxury consumption more, a trade-off a single flat rate would remove.
• States rely on GST revenue and have historically resisted rate changes that could reduce their share without firm compensation guarantees from the centre.
• Sudden, large rate changes create short-term disruption for businesses that have built pricing and inventory systems around the existing structure.

Most VAT and GST systems internationally use two or three rates rather than India's original five-plus structure. The United Kingdom uses a standard rate with a reduced rate and a zero rate for essentials, and Australia's GST is a single flat rate with specific exemptions rather than multiple slabs. India's 2025 reform moves it closer to this more common two-or-three-rate international pattern, though the new 40% de-merit rate for luxury and harmful goods remains a distinctly Indian addition rather than a standard feature elsewhere.

GST rate decisions are made by the GST Council, which includes both central and state finance ministers, so simplification efforts require negotiation across party lines rather than falling along a single ideological divide. States have generally pushed back on rate changes that risk revenue loss, while the central government has framed the 2025 reform as relief for consumers and businesses ahead of festive-season demand.

This question primarily reflects the Economy axis: comfort with a leaner, simpler tax structure tends to align with market-oriented views, while preference for a more tiered, redistributive tax structure aligns with state-interventionist views. It also carries a small Authority axis dimension, since centre-state negotiation over GST touches federal power-sharing.