One year of two-slab GST: Finance Minister cites a wider base and higher collections
Rates were cut, yet collections rose 11.6%. Is that proof the reform worked, or simply the government's own scorecard?
Published 5 October 2026. Written by Pratidin from the reports linked at the end; every fact checked by a separate review before publishing. How we work
In an article in The Hindu on 5 October 2026, Union Finance Minister Nirmala Sitharaman reviewed the first year of the "Next-Gen GST" reform. On 3 September 2025, the 56th meeting of the GST Council, which she chairs, replaced the four main rates of 5%, 12%, 18% and 28% with a standard rate of 18%, a merit rate of 5% and a special de-merit rate of 40%. The new rates took effect for most goods and services on 22 September 2025; tobacco products were deferred until compensation cess obligations are met. Small cars, motorcycles up to 350 cc, air conditioners, televisions and cement moved from 28% to 18%; individual life and health insurance were exempted; 33 lifesaving drugs went from 12% to nil; and UHT milk, pre-packaged paneer and Indian breads such as roti and paratha became nil-rated.
The minister's article argues that "a lighter rate structure has been accompanied by a substantial expansion in reported economic activity". She reports that taxable supplies grew 25.8% between October 2025 and July 2026 over the year before, that business-to-consumer sales rose 26.7%, and that GST registrations reached about 1.71 crore by August 2026, up about 15%. Gross GST collections for April to September 2026 were ₹12.46 lakh crore, 11.6% higher than a year earlier; refunds in the same period were about ₹1.80 lakh crore; and State GST receipts, including IGST settlements, grew about 16%. Official data released on 1 October 2026 put September's gross collection at ₹2,03,521 crore (up 14.7%) and net collection at ₹1,76,520 crore (up 18.1%). The next phase, she writes, is process reform in registration, returns, refunds and the flow of input tax credit, to be placed before the GST Council.
These are the government's own figures and claims, and should be quoted as such. Growth in collections after rate cuts supports the view that tax buoyancy and compliance improved, but collections also reflect nominal growth in the economy, so the rate cuts cannot claim all the credit without further study. Structural gaps remain. Under Article 279A(5), petroleum crude, high speed diesel, motor spirit (petrol), natural gas and aviation turbine fuel stay outside GST until the Council recommends a date, so businesses in energy-intensive sectors still cannot claim input tax credit on these fuels. Alcohol for human consumption is outside GST by definition. The 40% rate replaces the earlier 28% plus compensation cess on luxury and sin goods, ending a separate layer of tax.
Prelims facts
- The 56th GST Council meeting (3 September 2025) adopted a standard rate of 18%, a merit rate of 5% and a special de-merit rate of 40%, effective 22 September 2025 for most goods and services.
- Gross GST collections for April to September 2026 were ₹12.46 lakh crore, up 11.6% year on year; September 2026 alone was ₹2,03,521 crore, up 14.7%.
- The Finance Minister reports 25.8% growth in taxable supplies (October 2025 to July 2026) and about 1.71 crore GST registrations by August 2026.
- Individual life and health insurance premiums were exempted from GST; small cars, ACs, TVs and cement moved from 28% to 18%.
- Article 279A(5) keeps petroleum crude, diesel, petrol, natural gas and ATF outside GST until the GST Council recommends otherwise.
Quick recall
- Which GST Council meeting approved the two-slab structure, and when?
- The 56th meeting, on 3 September 2025.
- From when did the new GST rates apply to most goods and services?
- 22 September 2025.
- The three GST rates after rationalisation?
- Merit rate 5%, standard rate 18%, special de-merit rate 40%.
- Gross GST collection, April to September 2026?
- ₹12.46 lakh crore, up 11.6%.
- Gross GST collection in September 2026?
- ₹2,03,521 crore, up 14.7%.
- Which constitutional provision creates the GST Council?
- Article 279A, inserted by the 101st Amendment Act, 2016.
- Which five petroleum products are outside GST until the Council decides?
- Petroleum crude, high speed diesel, motor spirit (petrol), natural gas and aviation turbine fuel (Article 279A(5)).
- In which case did the Supreme Court call GST Council recommendations persuasive, not binding?
- Union of India v. Mohit Minerals (2022).
Prelims practice question
With reference to the GST rate changes recommended by the 56th GST Council meeting in September 2025, consider the following statements:
1. The standard rate was fixed at 18% and a merit rate at 5%.
2. A special de-merit rate of 40% was introduced.
3. Cement was moved from the 28% slab to the 18% slab.
4. Premiums on individual health insurance were brought into the 5% slab.
Which of the statements given above are correct?
- 1 and 4 only
- 1, 2 and 3 only
- 2, 3 and 4 only
- 1, 2, 3 and 4
Show answer
Answer: (b) 1, 2 and 3 only. Statements 1, 2 and 3 are correct as per the Council's recommendations. Statement 4 is wrong: individual life and health insurance premiums were exempted (nil), not placed at 5%.
Use this in UPSC Mains: previous-year questions
Recurring theme: GST design, revenue performance and Centre-State fiscal relations
- How to use this
Use the 2025 rationalisation and the 2026 collection data to update the revenue implications of GST with current, specific figures.
- Gross GST for April to September 2026 was ₹12.46 lakh crore, up 11.6%, despite rates cut on 22 September 2025.
- State GST receipts, including IGST settlements, grew about 16% in April to September 2026, per government data.
- The 40% de-merit rate replaced the 28% plus compensation cess on most luxury and sin goods.
- How to use this
Argue that GST is still not fully efficacious because fuels remain outside it, while the 2025 reform simplified rates.
- Article 279A(5) keeps petroleum crude, diesel, petrol, natural gas and ATF outside GST, breaking the input tax credit chain.
- The 56th GST Council (3 September 2025) replaced four main rates (5%, 12%, 18%, 28%) with 5% and 18%, plus a 40% de-merit rate.
The 2025 decision to hold tobacco at old rates pending compensation cess obligations links to the compensation story, but the question is about COVID-era tensions.
Mains practice question
A year after GST rates were rationalised into two main slabs, collections have grown despite lower rates. Critically examine the claim that rate rationalisation has widened the tax base, and identify the reforms still pending. (250 words)
Model answer
On 22 September 2025, GST moved from four main rates to a standard 18%, a merit 5% and a de-merit 40%. A year on, the Finance Minister argues that the lighter rate structure has come with a wider base and higher collections.
Evidence cited for a wider base
- Gross collections for April to September 2026: ₹12.46 lakh crore, up 11.6%; September 2026 up 14.7%.
- Taxable supplies up 25.8% (October 2025 to July 2026); B2C sales up 26.7% (government data).
- Registrations about 1.71 crore by August 2026, up about 15%.
- State GST receipts, including IGST settlements, up about 16%, easing federal revenue worries.
Reasons for caution
- The figures are the government's own; collections also rise with nominal GDP, so the share due to rate cuts needs independent study.
- Gross growth (11.6%) must be read with refunds of about ₹1.80 lakh crore in the half-year.
- Tobacco items were left at old rates pending compensation cess obligations.
Pending reforms
- Bring petroleum crude, diesel, petrol, natural gas and ATF into GST; Article 279A(5) leaves this to the Council.
- Process reform in registration, returns and refunds, and smoother input tax credit, as the minister proposes.
- Make the GST Appellate Tribunal fully functional to cut disputes.
- Keep Centre-State trust in the GST Council, whose recommendations the Supreme Court in Mohit Minerals (2022) called persuasive, not binding.
Rate rationalisation has simplified GST; durable gains now depend on bringing fuels in and easing compliance.
The basics
Why this matters
GST is India's largest tax reform since Independence and a favourite of both Prelims and Mains. Its first big redesign, in September 2025, cut the number of main rates and lowered taxes on many daily goods. A year later the Finance Minister says collections rose anyway. To judge that claim you need to know how GST works, who sets its rates, and what still sits outside it.
How GST works
GST is a tax on each stage of supply, but each business deducts the tax it already paid on its inputs. This deduction is called input tax credit. Only the value added at each stage is taxed, so tax does not pile up on tax.
- 1ManufacturerPays GST on raw materials and charges GST on its sale.
- 2WholesalerClaims credit for GST paid to the manufacturer and charges GST on its own sale.
- 3RetailerClaims credit again and charges GST to the buyer.
- 4ConsumerBears the final tax; the government receives tax only on the value added at each step.
When a fuel such as diesel is outside GST, the tax paid on it cannot be credited, which brings back the cascading GST was meant to end. See Goods outside GST: petroleum and alcohol.
What changed in September 2025
- Four main rates: 5%, 12%, 18%, 28%
- Compensation cess on top of 28% for luxury and sin goods
- Insurance premiums taxed
- Merit rate 5% and standard rate 18%
- Special de-merit rate 40% for luxury and sin goods
- Individual life and health insurance exempted
The changes were recommended by the GST Council at its 56th meeting on 3 September 2025. The Council exists because of the 101st Constitutional Amendment and Article 279A. The 40% rate is linked to the end of the Compensation cess and the 40% rate arrangement.
The numbers so far
The Finance Minister also reports taxable supplies up 25.8% and B2C sales up 26.7%. These are government figures. Collections also grow when prices and output rise, so economists separate the effect of rate cuts from general growth before giving credit.
Reading a minister's article
An article by the Finance Minister is a statement of government policy and its claimed results. In answers, write "the government states" or "the Finance Ministry's data show". Pair the claims with the structural gaps, such as fuels outside GST and the process reforms she herself says are still pending.
Go deeper
In one line: A year after GST moved to a 5% and 18% structure with a 40% de-merit rate, the Finance Minister says the lighter rate structure has come with a wider base and higher collections, with gross collections up 11.6% in April to September 2026.
Why it matters for UPSC
GST questions appear in GS3 (resource mobilisation, tax buoyancy) and GS2 (fiscal federalism, the GST Council). The 2025 reform changed the rate structure that most textbooks still describe, so updated facts are needed for Prelims.
The core idea
GST was made possible by the 101st Constitutional Amendment and Article 279A, which created the GST Council where the Centre and States set rates together. In September 2025 the Council cut the main rates to two and added a 40% rate that replaced the old 28% plus cess, explained in Compensation cess and the 40% rate. Collections rose despite lower rates, which the government reads as a wider base. Fuels remain a gap, as Goods outside GST: petroleum and alcohol explains.
Numbers and dates to remember
- 3 September 2025: 56th GST Council meeting.
- 22 September 2025: new rates in force for most goods and services.
- 5%, 18%, 40%: merit, standard and de-merit rates.
- ₹12.46 lakh crore: gross GST, April to September 2026, up 11.6%.
- ₹2,03,521 crore: September 2026 gross GST, up 14.7%.
- About 1.71 crore: GST registrations by August 2026.
Where to go next
- 101st Constitutional Amendment and Article 279A: the constitutional base of GST.
- GST Council: who decides GST rates and how votes are weighted.
- Compensation cess and the 40% rate: how the old cess was replaced.
- Goods outside GST: petroleum and alcohol: what still escapes the input tax credit chain.
Go deeper: has rate rationalisation paid for itself?
The government's case. The Finance Minister's article points to taxable supplies up 25.8%, B2C sales up 26.7%, registrations near 1.71 crore and gross collections up 11.6% in the first half of 2026-27. The argument is classic tax buoyancy: lower and simpler rates reduce the gain from evasion, draw more businesses into the net and lift consumption, so revenue holds up. State receipts, up about 16% including IGST settlements, are offered as proof that States did not lose, a key concern in the GST Council.
The sceptic's questions. First, collections rise with nominal GDP; separating the effect of rate cuts needs independent analysis, not ministerial data alone. Second, gross numbers can flatter; refunds of about ₹1.80 lakh crore in the half-year matter for net revenue. Third, the end of the Compensation cess and the 40% rate arrangement shifted revenue between layers, which complicates year-on-year comparison for some goods.
Unfinished business. Goods outside GST: petroleum and alcohol still break the input tax credit chain for transport and energy-heavy industry. Including fuels needs Centre-State agreement, because both earn large revenue from them outside GST. The minister herself lists process reform in registration, returns, refunds and credit flow as the next step.
Federal angle. The 101st Constitutional Amendment and Article 279A created shared sovereignty over indirect tax. In Mohit Minerals (2022) the Supreme Court held that Council recommendations are persuasive, not binding, which keeps the system resting on cooperation rather than command.
101st Constitutional Amendment and Article 279A
The constitutional change that made GST possible.
In one line: The Constitution (One Hundred and First Amendment) Act, 2016 gave both Parliament and State legislatures the power to levy GST and created the GST Council under Article 279A.
Why an amendment was needed
Before GST, the Constitution divided indirect taxes: the Centre taxed manufacture (excise) and services, while States taxed sales (VAT). Neither could tax the whole chain. The 2016 amendment inserted Article 246A, giving both levels concurrent power to make laws on GST, and Article 269A, under which the Centre levies Integrated GST (IGST) on inter-State supplies and shares it with States.
Key provisions
- Article 246A: concurrent power to levy GST.
- Article 269A: IGST on inter-State trade.
- Article 279A: the GST Council.
- Article 366(12A): defines GST as any tax on supply of goods or services, except on alcoholic liquor for human consumption.
GST was launched across India on 1 July 2017.
Where to go next
GST Council
The Centre-State body that recommended the 2025 rate cuts.
In one line: A constitutional body under Article 279A, chaired by the Union Finance Minister, that recommends GST rates, exemptions and rules to the Centre and States.
Composition and voting
Members are the Union Finance Minister (chair), the Union Minister of State for Finance, and the finance or other nominated ministers of every State. One-half of members form the quorum. A decision needs three-fourths of the weighted votes of members present and voting; the Centre's vote has one-third weight and all States together two-thirds. So neither the Centre alone nor the States alone can carry a decision.
Status of its recommendations
In Union of India v. Mohit Minerals (2022), the Supreme Court held that the Council's recommendations are persuasive and not binding on Parliament and State legislatures, reflecting cooperative federalism.
Why it is in the news
Its 56th meeting on 3 September 2025 approved the 5%, 18% and 40% structure, and process reforms are now to be placed before it.
Where to go next
Compensation cess and the 40% rate
Explains the new top rate and why tobacco items were treated separately.
In one line: A cess levied on luxury and sin goods to compensate States for revenue loss after GST, now giving way to a single 40% de-merit rate.
Origin
When GST began in 2017, States gave up many taxes. The GST (Compensation to States) Act, 2017 promised them compensation for five years, funded by a compensation cess on goods such as tobacco, pan masala, aerated drinks and luxury cars, charged on top of the 28% rate. During the pandemic, collections fell short, and loans were raised to pay States; the cess was extended beyond the original five years to repay them.
The 2025 change
The 56th Council meeting created a special de-merit rate of 40% for luxury and sin goods, replacing the 28% plus cess combination for most such goods. Tobacco products such as pan masala and cigarettes were kept on the old arrangement until the compensation cess obligations are met.
Why it is in the news
The end of the cess layer is part of the simplification the Finance Minister credits for the past year.
Where to go next
Goods outside GST: petroleum and alcohol
The biggest remaining gap in India's GST chain.
In one line: Five petroleum products are outside GST until the GST Council recommends a date, and alcohol for human consumption is outside GST by constitutional definition.
What is excluded
- Article 279A(5): petroleum crude, high speed diesel, motor spirit (petrol), natural gas and aviation turbine fuel. These are taxed through Central excise duty and State VAT.
- Article 366(12A): alcoholic liquor for human consumption is excluded from the definition of GST, so States keep their excise on it.
Why it matters
GST works by letting businesses deduct tax paid on inputs. Taxes paid on diesel or ATF cannot be credited against GST, so transport, aviation and energy-heavy industries carry a cascading tax burden. Bringing fuels into GST would need the Council's recommendation and agreement on how the Centre and States share the large revenue these products yield.
Why it is in the news
Fuels outside GST remain the main structural gap after the 2025 rate rationalisation.
Where to go next
Prelims-style quiz
Consider the following statements about the GST Council:
1. It is chaired by the Union Finance Minister.
2. The Union government's vote carries one-third of the total weight.
3. Its recommendations are binding on Parliament and State legislatures, as held by the Supreme Court in 2022.
How many of the statements given above are correct?- Only one
- Only two
- All three
- None
Show answer
Answer: (b) Only two. Statement 1 is correct. Statement 2 is correct: the Centre has one-third and the States together two-thirds of the weighted votes, and decisions need three-fourths of weighted votes. Statement 3 is wrong: in Mohit Minerals (2022) the Supreme Court held the recommendations persuasive, not binding.
Consider the following items:
1. Petroleum crude
2. Aviation turbine fuel
3. Natural gas
4. Alcoholic liquor for human consumption
How many of the above are currently outside the levy of GST?- Only one
- Only two
- Only three
- All four
Show answer
Answer: (d) All four. Items 1 to 3 are among the five petroleum products that Article 279A(5) keeps outside GST until the Council recommends a date. Item 4 is excluded by the definition of GST in Article 366(12A). So all four are outside GST.
Consider the following statements:
Statement-I: Businesses that use diesel cannot claim input tax credit for the taxes paid on it.
Statement-II: High speed diesel is outside the GST levy until the GST Council recommends a date for its inclusion.
Which one of the following is correct in respect of the above statements?- Both Statement-I and Statement-II are correct and Statement-II explains Statement-I
- Both Statement-I and Statement-II are correct and Statement-II does not explain Statement-I
- Statement-I is correct but Statement-II is incorrect
- Statement-I is incorrect but Statement-II is correct
Show answer
Answer: (a) Both Statement-I and Statement-II are correct and Statement-II explains Statement-I. Input tax credit is available only for GST paid. Diesel is taxed through excise duty and State VAT, not GST, because Article 279A(5) keeps it outside GST. Statement-II therefore explains Statement-I.
Consider the following statements regarding the September 2025 GST changes:
1. Small cars and motorcycles up to 350 cc moved from 28% to 18%.
2. Tobacco products were moved to the 40% rate from 22 September 2025 along with other goods.
Which of the statements given above is/are correct?- 1 only
- 2 only
- Both 1 and 2
- Neither 1 nor 2
Show answer
Answer: (a) 1 only. Statement 1 is correct. Statement 2 is wrong: changes for tobacco products such as pan masala and cigarettes were deferred until compensation cess obligations are met.
According to official data released on 1 October 2026, what was the growth in gross GST collections for April to September 2026 over the same period of the previous year?
- 8.2%
- 11.6%
- 14.7%
- 18.1%
Show answer
Answer: (b) 11.6%. Cumulative gross collections were ₹12,46,278 crore, up 11.6%. 14.7% was the growth in September alone, and 18.1% the growth in September's net collection.