Realising the full potential of GST reforms

The Prime Minister and Finance Minister have delivered a true Deepavali gift to the citizens of India by reducing the number of slabs under the Goods and Services Tax (GST) to only two: 5% and 18%. This is also a strategic response to global trade uncertainty, such as the 50% tariff on Indian goods by the U.S. Yet, the fiscal challenge for the States remains, as 6-8% of collections came from the 5% slab, 5-6% from the 12% slab, 70-75% from the 18% one, and 13-15% from the 28% one. This exposes them to short-term revenue risks.

Andhra Pradesh has demonstrated a strong fiscal performance in recent times, with its GST collections recording a 21% surge in August 2025, reaching a gross collection of ₹3,989 crore. This buoyancy, driven by improved compliance and an expanding tax base, provides a strong foundation. However, some reports estimate the annual revenue loss may range from ₹1,500 crore to ₹7,000 crore as a result of the GST rate cuts.

To ensure minimal effect to the States from these revenue losses, supply side measures are necessary. These will meet the increased demand due to rate cuts. Without them, the anticipated boost in consumer demand might not be fulfilled by the supply side. Therefore, the State and Central government need to actively implement schemes to maximise benefits from the GST rate cuts. Given below are three examples to illustrate this point.

First, the GST reduction on cement from 28% to 18% is a significant victory for the real estate and construction industry, a major engine of economic growth. This cut, along with reductions on other key materials such as marble, granite, and sand-lime bricks from 12% to 5%, is expected to reduce overall construction costs by as much as 5%. This makes houses more affordable for consumers at a time when housing demand remains strong in major urban centres.

But the reduction in construction material costs will strengthen the economy only if it translates into timely completion of houses sanctioned under schemes such as the Pradhan Mantri Awas Yojana (PMAY). A parliamentary answer states that the completion rate under PMAY in the last five years is only 35% in Andhra Pradesh. Thus, while the GST cut serves as a macro-level financial incentive, effective implementation of PMAY at the State level is crucial to ensure that these rate cuts lead to faster completion of houses and, in turn, generate tangible economic value.

Second, the GST rate cut on handicrafts from 12% to 5% is a significant lifeline for traditional artisan communities. In Andhra Pradesh, artisans producing Kondapalli wooden toys, Etikoppaka toys, and Mangalagiri and Dharmavaram sarees will benefit from the reduced tax burden, which will make their products more affordable and competitive. However, the supply chain must be robust and well-supported. The Scheme of Fund for Regeneration of Traditional Industries (SFURTI) is the government’s key instrument for providing supply-side support. In the last five years, SFURTI has benefited over 2,18,000 artisans nationwide, including 8,492 in Andhra Pradesh. According to a parliamentary answer, the continuation of SFURTI has been awaiting approval though. As a result, no new proposals are being approved. The full potential of the GST reform on the handloom and handicrafts sector is at risk until SFURTI is extended.

Third, in agriculture, GST on various farm machinery has been reduced from 12% to 5%, while GST on key fertilizer inputs such as sulphuric acid, nitric acid, and ammonia has been slashed from 18% to 5%. These measures lower input costs for farmers, thereby incentivising higher production. However, this boost in production will generate real economic value only if supply chain infrastructure is strengthened to handle the increased output. For instance, the Agri Infrastructure Fund aims at providing post harvest infrastructure financing. As of June 2025 under this fund, only ₹66,000 crore has been utilised across all the States combined, despite a total debt financing facility of ₹1 lakh crore being allocated for each State and Union Territory.

It is only through this synergistic approach combining macro-level tax policy with on-ground scheme implementation India can turn this Deepavali gift into fireworks for the economy.

Lavu Sri Krishna Devarayalu, Lok Sabha MP, Narsaraopet; Yateen Deepak is a Legislative Researcher