Goods and Services Tax on luxury goods: A step toward equity or a tax maze in the making?

Eight years after the rollout of India’s Goods and Services Tax (GST), the country’s most ambitious tax reform continues to evolve. Introduced in July 2017 with the vision of “One Nation, One Tax,” the GST aimed to simplify and unify India’s indirect tax landscape. As the regime matures, proposals that were once considered outliers are now beginning to shape mainstream policy discussions. Among them is a significant proposition floated in early 2024 by the Group of Ministers (GoM) on rate rationalisation.

The GoM suggested that high-end consumer goods—such as premium watches, shoes, and garments—be moved into higher GST brackets based on their price. For example, watches priced above INR 25,000 and footwear above INR 15,000 may shift from the 18% slab to 28%. In the case of garments, those priced above INR 10,000 could be taxed at an even higher rate of 35%, with mid-range apparel (INR 1,500 to INR 10,000) continuing at 18%, and budget clothing (below INR 1,500) at 5%. Though these proposals were not formally discussed during the 55th GST Council meeting, they remain on the agenda and could be taken up in future deliberations.

At first glance, the idea aligns with sound tax policy principles. By focusing on discretionary, high-value consumption, the proposal reflects an intent to make the system more progressive. As India’s affluent population continues to expand—from an estimated 60 million in 2023 to a projected 100 million by 2027—the potential tax base for luxury goods is widening. Taxing those who can afford non-essential items at a higher rate can help generate much-needed revenue to fund public goods such as infrastructure, healthcare, and education. The logic also follows existing precedents, as items such as luxury cars, five-star hotel stays, and tobacco products already attract 28% GST. Applying a similar approach to upscale consumer products may promote horizontal equity within the system.

That said, the method of applying GST based on price bands within the same product category deserves closer examination. India's GST framework already includes multiple tax rates—0%, 5%, 12%, 18%, and 28%—and special rates for items like gold and diamonds. Introducing price thresholds within categories such as apparel or accessories may further fragment the system. For businesses, especially small and mid-sized ones, this creates compliance challenges. Differentiating products purely on price for tax purposes may not only complicate classification and invoicing but also increase the scope for disputes and litigation.

More importantly, price-band-based GST may affect demand and employment in segments beyond the immediate luxury goods category. These goods often support larger value chains, including design, manufacturing, logistics, retail, and after-sales services. Higher taxes could suppress demand and affect employment across these ecosystems. There are historical parallels to this concern. The luxury tax imposed by the United States in the early 1990s on items like yachts led to a sharp decline in demand, shuttering manufacturing facilities and causing significant job losses. The tax was later repealed.

Higher GST on luxury items may affect India’s global competitiveness. Countries like the UAE and Singapore levy significantly lower indirect taxes (5% and 9%, respectively). Indian consumers could prefer overseas purchases, and exporters of premium Indian goods may find themselves at a disadvantage.

Another concern is the potential rise in tax evasion techniques, including under-invoicing and transaction splitting to stay below the defined thresholds. Far from increasing the government’s revenue pool, such practices could dilute the tax base and encourage informality in the system.

If the underlying objective is to encourage domestic production and reduce reliance on imported luxury goods, modifying Customs duties may be a more precise instrument. A well-calibrated tariff structure can protect local industry without disturbing the internal GST framework or adding to compliance burdens. While the intention to tax luxury consumption is understandable, doing so by adding another layer of complexity within the GST may undermine the very goals of simplicity and efficiency that the system was designed to achieve. Increased affordability of luxury items and consumption patterns should also be driving factors in determining taxability of these goods.

The GoM’s proposal is a well-meaning attempt to reconcile revenue enhancement with equitable taxation. However, any move that alters rate structures must be weighed against its operational feasibility, economic consequences, and potential unintended outcomes. With the GST still evolving, this is an opportune time to focus on streamlining the regime—rationalising exemptions, addressing inverted duty structures, and ensuring that the slabs we already have are clearly defined and easy to administer. Furthermore, the Government may consider fitment of these goods in line with the expected three-rate GST structure instead of creating a new rate structure of said goods.

As India continues on its journey to refine its tax system, clarity and simplicity must remain guiding principles. Price-based GST rates may look progressive on paper but risk creating fragmentation in practice. A consultative approach that draws on stakeholder feedback, real-world data, consumption patterns and international experience will be key to striking the right balance between equity, efficiency, and economic growth.

This article first appeared in the CNBC-TV18 on 30 June 2025.