In 1930, Mahatma Gandhi’s defiance of the Salt Tax exposed how oppressive taxation can alienate the citizen from the state. It was a stark reminder that when taxes are arbitrary or excessive, they undermine trust and the social contract. Four decades later, India witnessed another extreme with Indira Gandhi raising income tax level to astonishing 97.5%.
This legacy bred a deep equation of distrust between the taxpayer and the state. For decades, compliance was driven by fear. It encouraged avoidance rather than active contribution. It is against this backdrop that the Modi government’s tax reforms, beginning 8 years ago and carried forward decisively in 2025, mark a clear break from the past.
Underlying this shift is the logic of the Laffer curve that low tax rates are suboptimal for revenue generation and expand the tax base. India’s 2025 tax reforms thus represent not just fiscal change, but a philosophical one, from coercion to cooperation, and from distrust to a renewed social contract between the state and the citizen.
The Pre-GST Reality: Fragmentation, Leakage and Distrust
During the VAT regime, multiplicity of indirect taxes created massive confusion with states repeatedly tweaked VAT rates, abandoning the uniform slabs of 0%, 4%, and 12.5%.
In fact, despite clear warnings, states ignored the pointed advice of the CAG in its 2010 report against imposing additional levies, yet entry taxes and local surcharges continued. This created confusion and fragmentation, with each state enforcing its own compliance rules, penalties, and processes.
The consequences were severe. Weak scrutiny and inconsistent enforcement encouraged evasion. One in every two dealers attempted to evade tax, and in one case alone, seven dealers were granted exemptions worth ₹1,026 crore without proper documentation.
Next-Generation GST Reforms (2025): Simplicity as Strategy
The introduction of GST in 2017 was historic. It unified India into a single market, ended cascading taxes, and laid the foundation for a transparent indirect tax system. However, ambiguities in rates and classifications led to disputes and undeniably there was huge issues in compliance as well as registration.
For instance, let’s take the textile sector, services like washing and dyeing were taxed at 5% as part of “job work services,” while processes such as bleaching, printing, and chemical treatments attracted 18%. This led to severe confusion over classification and led to tax disputes.
Recognizing these challenges, the Modi government introduced Next-Generation GST reforms in 2025, delivering the most meaningful simplification since GST’s launch. The system was rationalised into two clear slabs, 5% and 18%. At the same time, classification of items was also clarified, compliance made simpler and registration made easier.
Over the past 8 years, the government has actively listened to businesses and states, treating states as equal partners in implementation. This collaborative approach ensured the reforms were rolled out smoothly.
The 2025 GST reforms did more than simplify taxes; they directly stimulated demand across multiple sectors.
India recorded highest Diwali sales of ₹6.05 trillion an increase of over 25% from the previous year and witnessed its strongest Navratri sales in over a decade. Also the automobile retail sales in October 2025 rose 40.5% to an all-time high.
Critics who argued that simplifying GST and rationalizing rates would reduce tax revenue were also proved wrong. In October–November 2025, gross GST collections were 2.8% higher than the same period in 2024, despite the significant cuts in GST.
The cut in GST rates and the hike in I-T exemption limit will help households save Rs 2.5 lakh crore annually. All individual life and health insurance premiums will attract 0% GST, down from 18%. Means if a ₹20,000 base premium previously carried ₹3,600 GST (18%), making the payable ₹23,600. Post-exemption, you pay ₹20,000, a straightforward ₹3,600 saving.
The GST next-gen reforms, will lead to a saving of 13% in the household bills for groceries and daily essentials, while a small car buyer could save around Rs 70,000. AC purchase would result in a saving of Rs 2,800 as the GST rate of these items has been slashed from 28% to 18%.
By rationalising GST slabs and easing the tax burden on both essential and aspirational items, the government created an environment of confident spending and sustained demand.
A Middle-Class Tax Breakthrough
India’s income tax journey mirrors its economic evolution. The Indira Gandhi, era confiscatory tax regime, with tax rates touching 97.5%, entrenched evasion and distrust. Decades later, despite liberalisation, relief remained modest, in 2014; income tax exemption was capped at ₹2 lakh, barely adequate for an urbanising economy.
The Modi government has steadily eased the tax burden on the middle class, prioritizing policy consistency over episodic measures. Over the past decade, the income tax exemption limit has risen from ₹2 lakh in 2014 to ₹12 lakh in 2025, offering a 6X relief.
For salaried employees, after accounting for the standard deduction of ₹75,000, the effective nil-tax threshold is now ₹12.75 lakh per annum.
A tax payer in the new regime with an income of Rs 12 lakh will get a benefit of Rs 80,000 in tax. While a person having income of Rs 18 lakh will get a benefit of Rs 70,000 in tax.
From the Salt Tax to confiscatory income tax rates, India’s history shows that poorly designed taxation weakens trust and growth. The Modi government’s 2025 tax reforms represent a decisive break from that past. By prioritising simplicity, fairness, and transparency, the state has strengthened compliance while energising consumption.
In 2025, taxation in India is no longer an instrument of control. It is a partnership, one that recognises that when citizens are trusted and systems are simple, the economy responds with growth.
Courtesy: Press Information Bureau (PIB)
