Summary

Prime Minister Narendra Modi’s government has introduced a landmark package of income tax relief measures and Goods and Services Tax (GST) rate rationalisations aimed at stimulating economic growth, simplifying the tax system, and boosting consumer demand in India. Announced as part of the Union Budget 2025 and implemented in phases starting September 2025, these reforms mark a significant overhaul of India’s direct and indirect tax frameworks. They include raising the income tax exemption limit to ₹12 lakh, making earnings up to this threshold effectively tax-free under the new default tax regime, and simplifying GST slabs from multiple rates to primarily two main rates of 5% and 18%, with an additional 40% levy on select “sin” and luxury goods.
The income tax reforms reduce the number of slabs from six to five and increase the rebate under Section 87A, thereby providing greater relief particularly to middle-income taxpayers and salaried individuals while retaining the option to choose the older tax regime with its deductions and exemptions. Meanwhile, the GST rationalisation eliminates intermediate tax rates and lowers levies on essential consumer items, agricultural inputs, and manufacturing sectors, aiming to reduce costs, improve compliance for Micro, Small and Medium Enterprises (MSMEs), and stimulate domestic consumption. These measures seek to address recent economic challenges including slowing GDP growth, inflationary pressures, and trade uncertainties by enhancing disposable incomes and reducing production costs.
While widely welcomed by economists and stakeholders for their potential to boost private consumption—which accounts for over 60% of India’s GDP—and improve manufacturing competitiveness, the reforms have raised concerns about short-term fiscal revenue losses estimated at around ₹57,600 crore (0.16% of GDP). The government anticipates that increased tax buoyancy from higher compliance and consumption growth will offset these losses over time, following precedents set by earlier tax rationalisations. The phased elimination of the GST compensation cess by March 2026 further underscores the intent to make GST a more effective instrument of economic policy.
These reforms also reflect the government’s broader policy objectives of simplifying the tax system, formalising the unorganised sector, and supporting the Atmanirbhar Bharat initiative to enhance economic self-reliance. Implementation involves legislative amendments, federal cooperation through the GST Council, and enhanced compliance measures such as mandatory multi-factor authentication for certain taxpayers. By balancing tax relief with structural adjustments, the Modi administration aims to foster a sustainable economic recovery while promoting inclusive growth across diverse segments including middle-class households, MSMEs, farmers, and exporters.

Background

Since coming to power in 2014, the BJP government under Prime Minister Narendra Modi has undertaken several significant reforms in India’s taxation system to boost economic growth and ease the burden on taxpayers. One of the landmark reforms was the introduction of the Goods and Services Tax (GST) on 1st July 2017, which replaced multiple indirect taxes with a single unified tax system aimed at improving transparency, compliance, and business competitiveness. The GST reforms targeted simplifying compliance for Micro, Small and Medium Enterprises (MSMEs), reducing costs, encouraging formalization of the unorganised sector, and expanding the tax base. Moreover, reductions in GST rates on essential goods were implemented to increase purchasing power and stimulate demand, especially in sectors such as consumer durables.
In parallel, the government introduced a new income tax regime through the 2020 budget, which aimed to make taxation simpler and more affordable. Key features included reducing the number of tax slabs from six to five, raising the no-tax threshold for individuals earning up to ₹7 lakh per annum, and making the new regime the default option for taxpayers. However, taxpayers retained the flexibility to opt for the old tax regime if it was more beneficial to them. These reforms were designed to provide relief to millions of families, especially in the wake of economic challenges posed by the COVID-19 pandemic and subsequent inflationary pressures.
Economists have noted that domestic demand is expected to play a crucial role in offsetting external economic challenges, supported by policy measures such as tax relief, favorable monsoon conditions, and pay commission adjustments. Additionally, easing inflation has helped improve real purchasing power, further bolstering demand in the economy. The combined effect of these reforms and economic conditions aims to enhance manufacturing competitiveness, increase consumer purchasing power, and position GST not only as a tax instrument but also as a catalyst for sustained economic growth.

Income Tax Relief Measures

In a significant move aimed at providing relief to millions of taxpayers, the government raised the income tax exemption limit, making earnings of up to ₹1.2 million (approximately $13,841 or £11,165) entirely tax-free, excluding special rate incomes like capital gains. This measure was seen as an effort to stimulate urban consumption, although its overall impact may be limited as only about 1.6% of Indians (22.4 million people) actually pay income tax.
The Finance Act 2024 designated the new tax regime as the default tax system for individuals, Hindu Undivided Families (HUFs), Association of Persons (AOPs), and other specified entities starting Assessment Year 2024-25. Taxpayers retain the option to opt out of the default new regime and continue with the old tax regime, which allows for various deductions and exemptions not available under the new system. The old regime includes numerous allowable deductions, such as Section 80C, which permits exemptions up to ₹1.5 lakh on investments and other specified expenses.
The new tax regime simplifies the tax filing process by reducing the number of slabs and eliminating many deductions, benefiting taxpayers overwhelmed by the complexity of the old system. For FY 2024-25, income up to ₹3 lakh is exempt under the new regime, with slab rates starting at 5% for incomes between ₹3 lakh and ₹7 lakh, increasing progressively to 30% for incomes above ₹15 lakh. The Budget 2025 tax reforms substantially increased the rebate under Section 87A to ₹60,000 for individuals with taxable income up to ₹12 lakh, effectively making incomes up to this limit tax-free under the new regime. Previously, the rebate was ₹25,000 for incomes up to ₹7 lakh, marking a significant increase in tax relief for middle-income earners.
Marginal relief provisions apply to taxpayers earning beyond specific thresholds (₹50 lakh, ₹1 crore, ₹2 crore, and ₹5 crore in the old regime; and ₹50 lakh, ₹1 crore, ₹2 crore in the new regime) to ensure smooth tax computation around surcharge limits. Additionally, a health and education cess of 4% is levied on the income tax plus surcharge in both regimes.
While the new regime offers lower tax rates and increased liquidity by removing mandatory tax-saving investments, taxpayers opting for it forego exemptions such as House Rent Allowance (HRA) and Leave Travel Allowance (LTA), which remain accessible under the old regime. This trade-off provides taxpayers with flexibility to choose the regime that best suits their financial situation.

Goods and Services Tax (GST) Cuts

In a landmark reform unveiled by Prime Minister Narendra Modi, India’s Goods and Services Tax (GST) system underwent significant simplification and rate reduction aimed at boosting consumer demand, corporate profits, and overall economic growth. The GST structure was rationalized from four slabs to two main tax rates of 5% and 18%, with an additional 40% levy introduced exclusively for “super luxury,” “sin,” and demerit goods such as cigarettes and high-end cars. This reform, often referred to as GST 2.0, was implemented from September 22, 2025, coinciding with the festive period of Navaratri, to maximize its impact on consumption.
The rationalization eliminated the 12% and 28% tax slabs, making the tax system more transparent, easier to comply with, and less prone to disputes by providing predictability and stability in the rate structure. Essential everyday items such as roti, paratha, hair oil, ice creams, televisions, and certain food products like ultra-high temperature milk and paneer were either exempted or shifted to the lower 5% slab, significantly reducing prices for consumers. Additionally, life and health insurance services were exempted from GST, enhancing their accessibility.
Sectoral benefits were widespread. The textile industry, heavily impacted by prior U.S. tariffs, received relief through a GST rate cut from 12% to 5%, fulfilling long-standing industry demands. Agricultural sectors including fertilizers and machinery, along with renewable energy, benefited from lower input costs expected to improve farmers’ efficiency and demand. For MSMEs, the simplification and lower rates translated into reduced compliance burdens and operational costs, encouraging formalization of the unorganized sector and expanding the tax base.
The government projected a net revenue loss of approximately ₹576 billion (0.16% of GDP) in the fiscal year due to these cuts, but anticipated that increased consumption, manufacturing competitiveness, and compliance would offset this over time, similar to previous episodes where rationalization resulted in additional tax revenues of nearly ₹1 trillion. The elimination of the compensation cess by March 2026 was also planned to facilitate this transition and promote GST as an instrument of economic growth and policy effectiveness.

Economic and Fiscal Impact

The Union Budget 2025 was introduced against the backdrop of a slowdown in GDP growth to a two-year low of 5.4%, prompting calls for income tax rate cuts to stimulate consumption and economic activity. The income tax concessions primarily target the middle class, aiming to address the slump in urban consumption, although the overall impact may be constrained by the fact that only about 1.6% of Indians pay direct taxes.
A significant feature of the budget is the restructuring of the income tax regime, where individuals earning up to ₹7 lakh per year are exempted from paying taxes under the new regime. The new tax system, now the default, reduces the number of tax slabs from six to five, providing relief to millions who struggled through the COVID-19 pandemic and inflationary pressures. Marginal relief provisions have been introduced for higher earners to ease the surcharge burden.
On the indirect tax front, substantial GST rate rationalization has been implemented, including a shift to a simplified two-slab system of 5% and 18%, replacing earlier rates of 12% and 28%. This simplification is expected to enhance transparency, reduce compliance complexity, and stimulate domestic demand by correcting inverted duty structures prevalent in various sectors. The GST rationalization is projected to lead to a net revenue reduction of approximately ₹48,000 crore, shared between the central and state governments, adding to the fiscal strain.
Despite potential short-term fiscal tightening—with the fiscal deficit possibly widening from the budgeted 4.4% to around 4.5–4.6% of GDP in the absence of spending cuts or efficiency improvements—these tax reforms are anticipated to have positive macroeconomic effects. Lower GST rates on essential goods, including household items and sectors like fertilizers, agricultural machinery, and renewable energy, will reduce input costs and improve efficiency, thereby fostering both demand and supply-side growth.
The tax reliefs and GST cuts are expected to significantly boost domestic consumption, which constitutes over 60% of India’s GDP. Analysts forecast these measures could increase household spending power by 0.7% to 0.8% of GDP in the fiscal year ending March 2026, while also potentially reducing inflation by 1.1 percentage points if tax savings are fully passed on to consumers. This increase in disposable income and lower prices is likely to revive sluggish private sector investment, initiating a virtuous cycle of economic expansion.
Moreover, the reforms aim to improve the competitiveness of manufacturing and MSMEs by freeing up working capital, simplifying compliance, and reducing costs. This, coupled with the expected formalization of the unorganized sector and the eventual elimination of the compensation cess by March 2026, will strengthen Atmanirbhar Bharat objectives and foster broader economic growth. In key industrial hubs and startup ecosystems, the reduced compliance burden and lower tax rates are anticipated to lower operational costs, encourage hiring, and spur innovation, further amplifying the positive impact on consumption and economic dynamism.

Government Objectives and Policy Rationale

The Government of India, under Prime Minister Narendra Modi’s leadership, has embarked on a comprehensive reform agenda aimed at simplifying the tax structure and boosting economic growth through significant income tax relief and Goods and Services Tax (GST) rate rationalisation. Central to this initiative is the objective to strengthen governance by continuously improving the tax framework, fostering sustainable development and economic self-reliance.
A key policy rationale is to enhance competitiveness and reduce production costs for Indian businesses, enabling them to compete more effectively in the global market. By rationalising GST rates—especially moving towards a simplified two-slab system of 5% and 18%—the government aims to eliminate inverted tax structures that hampered working capital and manufacturing efficiency. This adjustment is expected to free up resources for MSMEs, which form the backbone of India’s economy, by lowering compliance costs and encouraging formalisation of the unorganised sector.
The reforms also seek to bolster domestic demand by increasing consumer purchasing power. Reducing GST on everyday consumer items, such as talcum powder, toothpaste, and shampoo from 18% to 5%, is designed to make essential goods more affordable, thereby stimulating consumption and supporting sectors like consumer durables. The elimination of the compensation cess by March 2026 is further expected to reduce the tax burden on consumers and businesses, positioning GST as a tool not only for revenue collection but also for economic growth and policy effectiveness.
Additionally, the government recognises the importance of mitigating external economic challenges, such as tariffs imposed by major trading partners. Though exports constitute a smaller portion of India’s GDP growth, trade tensions have prompted relief measures for exporters and pursuit of alternative markets through trade agreements, cushioning the economy from external shocks. The GST rationalisation and direct tax cuts announced in the Union Budget 2025-26 are anticipated to generate positive domestic demand impulses, offsetting adverse effects from global trade disruptions.

Stakeholder Impact

The recent tax reforms, including income tax relief and GST cuts, are designed to benefit a wide range of stakeholders across the Indian economy.

Middle Class and Poor Households

A significant portion of the tax relief targets the poor and neo middle-class segments. The income tax exemption limit has been raised to Rs 12 lakh, allowing many citizens to pay zero income tax up to this threshold. This change, coupled with the new GST slabs effective from September 22, is expected to generate savings exceeding Rs 2.5 lakh crore annually for these groups. PM Modi highlighted this “double bonanza” of income tax relief and GST cuts as simplifying financial obligations and helping citizens realize aspirations.

Salaried Employees and Individual Taxpayers

For salaried employees, among the largest tax contributors, earnings up to Rs 7 lakh now qualify for a full tax rebate under the new regime, resulting in zero tax liability. The new regime eliminates mandatory tax-saving investments, enhancing liquidity. However, individuals opting for it forego deductions like House Rent Allowance (HRA) and Leave Travel Allowance (LTA), which may increase taxable income in some cases. The 2023 Budget made the new tax regime the default and reduced slabs from six to five, providing relief especially to those affected by COVID-19 and inflation.

Small and Medium Enterprises (MSMEs) and Traders

MSMEs benefit from simplified compliance under GST rate rationalization. Reduced compliance burdens enable small traders and businesses to focus on growth and innovation rather than paperwork. This is expected to stimulate hiring and entrepreneurship, particularly in hubs like Surat and Bengaluru. Lower tax rates and easier compliance are also projected to boost consumption by increasing disposable income across sectors.

Farmers and Agricultural Sectors

Certain sectors, including fertilizers, agricultural machinery, and renewable energy, benefit from GST reforms via lower input costs. These reductions should improve efficiency and demand in agricultural activities, aiding farmers by reducing production expenses.

Affordable Housing Developers

The real estate sector, especially developers in affordable housing (priced below Rs 40 lakh), is expected to experience improved cash flows and margins due to tax relief. This is critical given the decline in affordable housing sales from 38% in 2019 to 18% in 2024, indicating a pressing need for stimulus.

Exporters and the Broader Economy

While exports form a modest part of GDP growth, concerns about external factors such as US tariffs remain.

Public and Expert Reactions

The recent income tax relief and Goods and Services Tax (GST) cuts announced by Prime Minister Narendra Modi have been met with widespread approval from both the public and economic experts. Public sentiment highlights the benefits extended to a broad demographic, including the common man, farmers, micro, small, and medium enterprises (MSMEs), the middle class, women, and youth. The Prime Minister himself emphasized that the reforms were designed with a focus on the common man, ensuring that taxes on daily use items have been drastically reduced, thereby improving ease of living and doing business, especially for small traders and businesses.
Economic analysts have largely welcomed the measures, pointing to the potential boost in domestic consumption. With private or household spending comprising over 60% of India’s GDP, similar to developed economies like the United States and the United Kingdom, the GST rate rationalisation is expected to stimulate demand and spur economic growth. Maulik Manankiwala, a partner at BDO India, remarked that the tax reductions, particularly those effective from September 22 to coincide with the festive season, would “definitely boost consumption” by making essential goods cheaper. Similarly, SBI Chief Economist Soumya Kanti Ghosh noted that the consumption uplift resulting from the GST rationalisation would more than offset any short-term revenue losses, attributing this to increased tax buoyancy as lower rates encourage higher purchasing.
From a policy perspective, experts have highlighted the structural advantages of the reforms. The simplification of the tax system, reduction in compliance burdens, and rationalisation of tax slabs are expected to widen the tax base and improve voluntary compliance. Radhika Rao, Senior Economist and Executive Director at DBS Bank, pointed out that these changes go beyond temporary demand stimulus and serve as long-term measures to enhance efficiency, particularly benefiting employment-intensive sectors like fertilizers, agricultural machinery, and renewable energy. Additionally, the elimination of the compensation cess by March 2026 is viewed as a step toward making GST an effective instrument not just for taxation but for broader economic growth and policy effectiveness.
The income tax cuts in the new regime have also drawn positive attention for their potential to increase disposable incomes for the middle class. By exempting income up to ₹3 lakh and introducing reduced slab rates up to ₹7 lakh, the reforms aim to inject more money into circulation and ease the tax burden. Tax experts emphasize that the new regime simplifies filing procedures by reducing deductions and exemptions, making compliance easier and more accessible for taxpayers. However, some economists have cautioned that the direct impact might be limited since only a small fraction of Indians currently pay direct taxes, with just 1.6% of the population contributing to income tax revenue as of 2023.
Market responses have been optimistic as well, with stock market analysts expecting a positive impact following the GST Council’s approval of the reforms. The anticipated ease of doing business and enhanced competitiveness for MSMEs are seen as catalysts for increased investment, hiring, and innovation in key economic hubs such as Surat and Bengaluru. Furthermore, correcting inverted tax structures and lowering rates are projected to free up working capital and support the Atmanirbhar Bharat initiative aimed at boosting domestic manufacturing.

Implementation and Legislative Process

The implementation of the new GST reforms and income tax relief measures announced by Prime Minister Narendra Modi involves a multi-stage legislative and administrative process aimed at ensuring a smooth transition and broad acceptance among stakeholders. The Finance Act 2024 plays a crucial role by amending Section 115BAC, making the new tax regime the default for individuals, Hindu Undivided Families (HUFs), Associations of Persons (AOPs) excluding co-operative societies, Bodies of Individuals (BOIs), and Artificial Juridical Persons effective from Assessment Year 2024–25.
The proposed GST reforms, approved by the 56th GST Council meeting chaired by Union Finance Minister Nirmala Sitharaman, include a significant rationalisation of tax rates. The current 12% and 28% GST slabs will be removed, replaced by a simplified two-rate structure of 5% and 18%, with a few exceptional “sin goods” being taxed at a higher 40% rate. This restructuring aims to correct inverted duty structures, reduce the accumulation of input tax credits, and enhance domestic value addition, supporting initiatives such as Atmanirbhar Bharat and improving competitiveness for MSMEs through simpler compliance and lower costs.
The Centre is actively engaging with State governments to secure their approval and collaboration, targeting to have the new tax structure operational by the Deepavali deadline of October 20. However, the ultimate implementation depends on the GST Council’s endorsement, which includes representatives from all states, ensuring a federal consensus before any changes take effect. The government plans to initiate these GST rate changes from 22nd September 2025, with the exception of tobacco and related products, which will retain the existing rates with compensation cess applied as per the ad valorem rate effective on 31 March 2023.
In parallel, enhancements in GST compliance mechanisms are being legislated and rolled out. Multi-Factor Authentication (MFA/2FA) will become mandatory for generating e-invoices and e-way bills for taxpayers with an aggregate annual turnover exceeding ₹20 Crores, with a phased expansion to all users by April 1, 2025. Additionally, amendments such as mandatory 10% pre-deposit of penalty amounts for certain appeals and the insertion of new penalty provisions related to the Track and Trace Mechanism are being introduced to improve enforcement and compliance.
The government is also extending GST exemptions and rationalising classifications—for example, providing IGST exemption on gold, silver, and platinum imports for specified banks and exempting satellite launch services supplied by ISRO and affiliated entities. To facilitate taxpayer convenience, measures like pre-filled GST returns, automated refunds, and eased MSME registration processes are being implemented.

Related Government Policies and Reforms

Prime Minister Narendra Modi’s government has implemented a series of significant reforms aimed at improving the tax framework in India, focusing on both income tax relief and the Goods and Services Tax (GST). These reforms emphasize good governance, ease of doing business, and benefiting the common man, farmers, MSMEs, and various other segments of society.

Income Tax Reforms

The government introduced a new tax regime in the 2020 budget, which features reduced tax slabs and rates compared to the old system. Notably, individuals earning up to ₹7 lakh per year are exempt from paying any income tax under this regime. The new tax regime has been made the default option, although taxpayers retain the choice to continue under the old regime, which allows various deductions and exemptions. These changes aim to provide relief to millions of families affected by the COVID-19 pandemic and inflation, thereby increasing disposable income and encouraging economic activity.

GST Reforms

Under the GST framework, next-generation reforms have been introduced to further simplify the tax structure and support economic growth. One of the major changes includes rationalizing the tax slabs from multiple rates to primarily two main slabs of 5% and 18%, eliminating intermediate rates such as 12% and 28%. This restructuring aims to increase transparency and reduce complexity in tax compliance. The reforms also focus on correcting inverted tax structures, which will free up working capital, improve manufacturing competitiveness, and support the Atmanirbhar Bharat initiative.
Furthermore, the government has targeted GST rate cuts on everyday consumer items, including essentials like talcum powder, toothpaste, and shampoo, reducing rates from 18% to 5%. This move is designed to make daily products more affordable and stimulate demand in sectors such as consumer durables. The government also plans to eliminate the compensation cess by March 2026, which will further streamline GST and promote economic growth and policy effectiveness.