Critically examine whether indirect tax rationalisation (such as GST rate cuts) can sustainably boost consumption in an inflationary environment.

The GST Council's 56th meeting collapsed the four-slab structure into principally 5% and 18%, with a 40% rate on luxury and sin goods, effective 22 September 2025 [1]. Rate cuts can lift consumption, but their durability depends on price pass-through and the inflation path — making the claim only partly sustainable.

How rationalisation supports consumption

• Lower tax incidence on mass consumption: soaps, toothpaste, shampoo and hair oil moved 18% → 5%; butter, ghee, cheese and dry fruits moved 12% → 5%, raising real disposable income of households [1].
• Demand revival in big-ticket sectors: small cars, motorcycles up to 350cc, buses, trucks and auto parts cut 28% → 18% [1], aiding an auto sector that is a lead indicator for manufacturing and employment.
• Compliance and simplicity: fewer slabs reduce classification disputes and litigation, lowering transaction costs for MSMEs [1].

Why the boost may not be sustainable

• Inflation erosion: CPI inflation rose from 2.75% (Jan 2026) to 3.93% (May 2026), with food inflation at 4.78% [2]. Rising prices restore retail costs to near pre-cut levels, neutralising nominal relief.
• Incomplete pass-through: benefits may be absorbed in trade margins. Section 171, CGST Act mandates commensurate price reduction, but the Council fixed 1 April 2025 as the sunset for new anti-profiteering applications [3], weakening enforcement.
• Uneven response: automobiles gained while apparel demand stayed subdued, showing a one-off substitution rather than a broad-based demand shift.
• Fiscal cost: revenue foregone constrains capital expenditure and states' fiscal space, the deeper drivers of durable demand.

Tax rationalisation is therefore a necessary but insufficient stimulus — it shifts price levels once, while consumption growth needs sustained income growth. Pairing GST 2.0 with credible inflation management under the flexible inflation-targeting framework, supply-side easing in food, and a transparent pass-through monitoring mechanism would convert a one-time price gain into lasting consumption-led growth, consistent with cooperative federalism under Article 279A.