It is about a year back that the second-generation GST reforms were introduced in September 2025, and the most important selling point was that a simplified and reduced indirect tax would reduce consumer prices. The media was mobilised to speak in defence of the government as usual, and this was projected as one of the game changers, particularly for industries supposed to be facing sluggish demand. The argument was simple. Indirect taxes if reduced would reduce the price of the product and hence would generate demand as people would purchase more with declining prices. The government organised talk shows and media discussions and the reform was projected as another ‘surgical strike’ on inflation.

After a year, it is important to see whether consumer prices declined or not and how did it impact domestic demand. It is easily understandable that if tax on goods and services declines, whether this fall will be transferred to the final consumer price depends on several factors. If the fall in price does not increase demand proportionately or more, the revenue earned by the seller may decline due to the fall in tax and the seller in that case would not be inclined to pass on the tax cut to the consumer. In other words, if price falls by ten per cent and due to that if demand for that product increases by only five percent the seller will face a revenue loss due to tax cut. This is what is known as price elasticity of demand and if this elasticity is low then passing on the entire tax cut to the consumer is hardly opted for by the seller. On the other hand, if the producer enjoys a monopoly position where the sale of the product hardly depends on marginal fluctuations of price, then also there is low probability of the tax cut being translated into a fall in final prices. This is reflected by the fact that consumer goods produced by MNCs hardly show any fall in prices and changes are more visible in products marketed by domestic/local producers. Therefore, the idea that a decline in GST rates would automatically reduce prices was a propaganda primarily launched to add legitimacy and political support for the reform and also to hide the huge burden that the common people had to bear due to uncertainty on rates and high rate of taxes imposed for eight years since the introduction of GST in 2017.

IMPACT ON PRICES

It is important to note that all goods and services consumed in India does not attract GST; some attract no taxes, some might be attracting sales taxes but not GST. About 24.5 per cent of average monthly consumption expenditure in India comprises of goods and services that do not attract any GST. In addition to that, if we consider the consumption items that attract very low GST rates, that is less than 5 per cent, about 57.6 per cent of the average Indian consumption basket is not supposed to be affected by GST. A study by a research institute shows that only 28 per cent of goods and services consumed were supposed to be significantly impacted due to the change in GST rates. In other words, because of the composition of the consumption basket and the existing exemptions and low rates, the rate cut was supposed to impact roughly one fourth of average consumption expenditure.

It is also important that in different consumption classes, the relative importance of goods and services change and hence change in the tax rates would affect different classes of people differently. Therefore, the relief of tax cut would not be uniformly felt by all classes, and it is found that the decline does not have greater impact on the poor and middle class compared to the rich. The fall in prices due to cut in GST rates has impacted a very small proportion of consumer prices. A study shows that if we consider seven major consumption categories including food and beverages, clothing and footwear, transport, recreation, furnishing and maintenance, health, personal care and consider 96 items covered in these groups, prices have fallen only for 26 items and for the rest prices have actually increased. This indicates that even if GST rates have fallen, prices declined only for 27.1 per cent of consumer goods items.

But this might be accompanied by a rise in prices of goods and services which were not at all attracting GST. Prices of electricity and petrol have increased, which did give rise to increase in prices particularly of food items and food inflation continues to be high in the recent period. If the share of food is higher within the total consumption basket, as in the case of low- and middle-income groups, then the rise in food prices would affect the consumption expenditure adversely and the impact would be more for them compared to the higher income groups. Therefore, the tall claim that because of GST rate rationalisation demand in the economy would increase does not seem to be the case. In fact, one of the measures of aggregate consumption expenditure of the economy is per capita private final consumption expenditure. The growth of per capita private final consumption expenditure has declined from 2024-25 to 2025-26 and the longer-term trend in the growth of this consumption expenditure remains almost stable since 2015-16 except for abnormal fluctuations during the pandemic years. It is evident from the facts that due to rate rationalisation neither did final prices fall for all commodities affected by GST and nor did the aggregate growth of consumption demand show any rise as had been suggested during the introduction of reforms.

LESS TAX ON THE RICH

It is important to underline the fact that the larger part of the government’s revenue including centre and state comes from indirect taxes. Every citizen of the country, poor or rich, must pay indirect taxes when they buy something from the market. On the other hand, direct taxes are paid by people earning beyond a threshold of income or wealth. The burden of indirect tax has asymmetric impact upon different sections of the population because the same absolute amount per unit must be paid by people with different paying capacity defined by their income and wealth. In the case of India, while there has been a lot of discussion in the media that GST rationalisation will reduce the burden of taxes on common consumers, what is often kept out of sight is the fact that roughly 63 per cent of the centre plus state revenue comes from indirect tax and 37 per cent is collected through direct taxes. Also, the revenue generation through GST did have an initial effect of generating higher revenue due to expansion of base and simplification of taxes, but total revenue mobilised through GST as a ratio of GDP has started declining.

Most importantly revenue loss of the states due to GST and terminating of compensation to the states by the centre have substantially reduced the states’ capacity to spend on development and welfare heads. In other words, a reduction in revenue due to GST reforms would not be compensated by mobilising higher tax on the rich; rather the loss of revenue in many ways would be translated into reduction in expenditure that hurts the poor. It also reduces the autonomy of the states to mobilise their own resources and prioritise developmental goals. In any case, the GST system disfavours the vast majority of enterprises in India who are unregistered and cannot claim input tax credit for their purchase of inputs while the big enterprises get the advantage of claiming input tax credits.  It is also notable that due to rise in fuel price and electricity there has been a cascading effect on prices of consumption goods. Food inflation continues to be high and resources, particularly sugar cane and corn being used to produce biofuel, have caused rise in prices of animal feed and consequently poultry and eggs. All these adversely affect the consumption expenditure of the common people, which is completely ignored in the mainstream media.