GST 2.0: A Landmark Reform in India’s Tax Journey

UPSC Relevance Prelims:GST slabs & exemptions, Article 279A, GST Council composition, GSTAT. Mains (GS III):Taxation & economic reforms; GST 2.0’s role in ease of doing business, agriculture, health, federalism.

Why in News?

The 56th meeting of the GST Council (3rd September 2025) introduced what is being termed as “GST 2.0” — the most comprehensive reform since GST was first rolled out in July 2017. The decisions include simplification of tax slabs, sector-specific corrections, exemptions for health & insurance, rationalisation for farmers, operationalisation of GST Appellate Tribunal, and a focus on ease of compliance.

This reform is being hailed as a turning point in India’s indirect taxation history, directly impacting households, farmers, industries, and the wider economy.

Background: Evolution of GST in India

1. Pre-GST Era (Before 2017)

India had a fragmented indirect tax regime:

• Centre → excise duty, service tax, customs.
• States → VAT, octroi, entry tax, luxury tax.

This caused:

• Cascading effect (tax on tax).
• Logistics delays → trucks stopped at every state border to pay taxes.
• Different state rates → no single national market.

👉 Example: A product manufactured in Maharashtra and sold in Bihar could be taxed 3–4 times before reaching the consumer.

2. Introduction of GST (2017)

• On 1st July 2017, India launched Goods and Services Tax (GST) with the slogan:
   “One Nation, One Tax, One Market.”
• GST subsumed 17 taxes and 23 cesses, simplifying the tax landscape.
• It was seen as India’s biggest tax reform since Independence.

3. GST 1.0 – Main Features

• Multiple Tax Slabs: 5%, 12%, 18%, 28% (plus cess for luxury/sin goods).
• Input Tax Credit (ITC): Eliminated cascading by allowing businesses to claim credit for taxes already paid on inputs.
• GST Council (Article 279A): A federal decision-making body with Centre + States.
• Destination-based tax: Revenue goes to the state where goods/services are consumed (not produced).

4. Problems in GST 1.0

• Complex Structure: Four slabs + cess → difficult for businesses and consumers.
• Inverted Duty Structure: Inputs taxed higher than finished products (e.g., footwear, textiles).
• No GST Appellate Tribunal (GSTAT): Disputes piled up in High Courts.
• Small Business Burden: Digital compliance (e-filing, multiple returns) was tough for MSMEs.

👉 Example: A small trader in a Tier-2 town struggled with online filing due to lack of digital literacy.

GST 2.0 addresses these issues head-on.

About GST Council(prelims facts) The Goods and Services Tax (GST) Council is a constitutional body created under Article 279A by the 101st Constitutional Amendment Act, 2016.  It serves as the key decision-making body for all matters related to GST in India. Composition Chairperson → Union Finance Minister Members → Union Minister of State for Finance/Revenue Finance or Taxation Ministers of all States and Union Territories In case of President’s Rule in a State, a representative appointed by the Governor Quorum-For any meeting to be valid, at least 50% of total members must be present. Decision-Making Process *Consensus is the preferred mode of decision-making. If voting is required: *Union Government’s vote = 1/3rd weightage All States/UTs combined = 2/3rd weightage *A proposal passes only if at least 75% of the weighted votes support it. Functions of the GST Council 1-Recommend GST rates, exemptions, and threshold limits. 2-Resolve issues like inverted duty structure (when tax on inputs > tax on outputs). 3- Suggest model GST laws and amendments for uniformity across India. 4-Decide on special tax rates during natural disasters or emergencies. 5-Ensure harmonisation of GST laws across the Centre and States for smooth implementation.

GST 2.0 Reforms (2025)

1. Simplified Slab Structure

• Earlier: 4 slabs → 5%, 12%, 18%, 28%.
• Now: Only 3 slabs:
  
  
• 5% (Merit Rate): Essentials & common-use items.
• 18% (Standard Rate): Most goods and services.
• 40% (De-merit Rate): Luxury & sin goods (e.g., tobacco, high-end cars).
   Impact: Less confusion, predictable taxation, and fewer disputes.

2. Relief for Households & Consumers

• Essentials (soap, shampoo, toothpaste, cycles) → 5%.
• Daily foods (UHT milk, paneer, chapati, paratha) → Exempt.
• Packaged foods, noodles, chocolates → Rate cuts to encourage demand.
  👉 Impact: Boosts consumption, especially for middle-class and lower-income households.

3. Healthcare & Insurance Revolution

• Life & health insurance → Exempt from GST.
• Essential drugs/devices (cancer, dialysis, rare diseases) → Reduced or exempt.
  👉 Impact:
  • Makes insurance affordable → increases penetration.
  • Reduces out-of-pocket expenditure → a major cause of poverty in India.

4. Farmers & Agriculture Support

• Tractors & machinery → 5% (earlier 18%).
• Fertilisers, ammonia, sulphuric acid → 5% (earlier 18%).
  👉 Impact: Cuts input costs for farmers, improves rural productivity, and supports the agri-economy.

5. Boost to Labour-Intensive & Traditional Sectors

• Reduced rates for handicrafts, marble, granite, leather goods.
  👉 Impact: Protects jobs, strengthens exports, and promotes Make in India + traditional industries.

6. Correction of Inverted Duty Structures

• Man-made fibre & yarn → 5%, aligned with textiles.
• Cement → shifted from 28% → 18%.
• Renewable energy devices & auto components → reduced.
  👉 Impact: Removes distortions, boosts housing & infra, and supports the green economy.

7. Institutional Strengthening

• GST Appellate Tribunal (GSTAT) → operational in 2025.
• Provides faster dispute resolution, consistent rulings, and builds taxpayer trust.
  👉 Example: Earlier, businesses had to approach High Courts for GST disputes → now GSTAT will reduce judicial burden.

8. Process Reforms

• Provisional refunds in inverted duty cases.
• Risk-based compliance checks → reduces harassment of honest taxpayers.
• Simplified valuation rules → less paperwork.
  👉 Impact: Faster refunds, lower compliance burden, more taxpayer-friendly GST.

Expected Benefits of GST 2.0

1. For Consumers

• Essentials cheaper: Soap, shampoo, toothpaste, cycles now at 5%.
• Food relief: UHT milk, paneer, chapati, paratha → exempt.
• Healthcare protection: Insurance & essential medicines exempt.
  👉 Effect: Lower household expenditure → more savings → higher consumption.
   Example: A middle-class family spends less on basic goods and medical care, freeing money for education or better lifestyle.

2. For Farmers

• Lower cultivation costs: Fertilisers, ammonia, sulphuric acid now at 5%.
• Affordable machinery: Tractors & implements shifted from 18% → 5%.
  👉 Effect: Improves farm productivity, reduces rural indebtedness.
  Example: A farmer in Vidarbha buying a tractor now pays far less GST, making modernisation more viable.

3. For Industry & MSMEs

• Simpler regime: Only 3 tax slabs instead of 4.
• Inverted duty correction: Textiles, cement, renewable energy devices aligned properly.
• Compliance eased: Faster refunds + risk-based checks.
   👉 Effect: Improves ease of doing business and makes Indian goods globally competitive.
  Example: Textile MSMEs in Surat or Tiruppur benefit as GST on man-made fibre aligns with finished fabrics.

4. For Employment

• Labour-intensive sectors supported: Textiles, handicrafts, leather, marble, construction.
• Lower costs → higher production → more jobs.
  👉 Effect: Millions of jobs created in rural and semi-urban areas.
   Example: Handloom clusters in Varanasi or leather hubs in Kanpur benefit from reduced GST, sustaining traditional employment.

5. For the Economy

• Stimulus to demand: Lower consumer prices → higher consumption → stronger demand cycle.
• Better tax compliance: Simpler rates → fewer disputes → improved tax buoyancy.
• Investment push: Affordable cement & renewable energy devices boost infrastructure & green projects.
  👉 Effect: Sustained growth, fiscal stability, and inclusive development.

Challenges & Concerns in GST 2.0

1. Revenue Concerns

●      Issue: By cutting rates on essentials, agriculture, and insurance, the government risks lower GST collections.

●      States’ worry: They fear revenue shortfall since compensation cess (earlier mechanism) has ended.
👉 Why it matters: Less revenue = reduced ability to fund welfare schemes.
 Example: Punjab & Kerala already complain of reduced fiscal space under GST.

2. Implementation Hurdles

●      Issue: Transitioning from 4 slabs → 3 slabs needs major IT system upgrades (GSTN).

●      Requires awareness drives for taxpayers, training for officers, and changes in billing/accounting software.
👉 Why it matters: Without smooth transition, confusion may delay refunds and compliance.
 Example: When GST was first launched in 2017, system crashes and glitches slowed down business filings.

3. Compliance Burden for MSMEs 🏭

●      Issue: Even with simplified rules, small firms need digital literacy, internet access, and accountants.

●      MSMEs in rural/semi-urban areas struggle with e-invoicing, filing returns, and understanding slab changes.
 👉 Why it matters: Risk of excluding small traders from formal economy.
 Example: Small textile shops in Tiruppur may still rely on traditional cash systems.

4. Federal Tensions 🏛️

●      Issue: GST Council decisions require consensus. Rate cuts benefiting consumers may reduce state revenues.

●      Centre vs States clashes likely, especially financially weaker states.
 👉 Why it matters: GST is a federal compact under Article 279A—if trust breaks, it undermines cooperative federalism.
 Example: Recently, southern states like Tamil Nadu demanded more fiscal autonomy citing revenue loss under GST.

5. Judicial Backlog Risk ⚖️

●      Issue: GST Appellate Tribunal (GSTAT) is being operationalised in 2025.

●      Risk: It could become another overburdened tribunal like ITAT or NCLT.
👉 Why it matters: If cases pile up, disputes remain unresolved, reducing business confidence.
Example: Over 1.5 lakh GST-related disputes are already pending in High Courts.

Way Forward for GST 2.0

1. Ensure Revenue Neutrality

• Action: Conduct periodic impact studies on rate changes to check if revenue collections stay stable.
• Use AI-based invoice matching to plug leakages and detect fake billing.
• Expand GST base: Bring petroleum, electricity, and alcohol under GST gradually.
  👉 Example: Petroleum contributes ~20% of states’ revenue; including it will make GST a true “one nation, one tax.”

2. Strengthen Federalism 🏛️

• Create a transparent revenue-sharing formula between Centre and States.
• Revisit compensation mechanism to help states facing revenue stress.
  👉 Example: Kerala and Punjab, with weak tax bases, need transitional support until GST stabilises.
• Strengthen the role of the GST Council Secretariat as a neutral body for dispute resolution.

3. MSME Support 🏭

• Expand GST Suvidha Kendras in small towns to help businesses file returns easily.
• Introduce a simplified one-page return system for firms with turnover below ₹5 crore.
  👉 Example: Small textile exporters in Tiruppur or Moradabad handicraft clusters will benefit from reduced compliance costs.

4. Institutional Capacity ⚖️

• Make GSTAT professional and tech-driven, with time-bound dispute resolution (say, 6 months).
• Use AI & blockchain tools for real-time invoice reconciliation and fraud detection.
  👉 Example: Countries like South Korea use big data analytics to track GST/VAT evasion effectively.

5. Global Best Practices

• Singapore Model: Single-rate GST (7%, now 9%) = simplicity, higher compliance.
• EU VAT Model: Digital platforms for SMEs, standardised filing across countries.
  👉 India can adapt these models while keeping its federal structure intact.

Conclusion

GST 2.0 is not just a tax reform; it is a people’s reform.
 It touches farmers, consumers, workers, and businesses alike. By simplifying the structure, cutting rates on essentials, correcting distortions, and strengthening institutions, it provides a solid foundation for India’s growth journey.

If implemented effectively with fiscal prudence and cooperative federalism, GST 2.0 can become the bedrock of India’s vision of Viksit Bharat 2047, ensuring taxation is not just about revenue, but about equity, simplicity, and inclusive growth.

UPSC Prelims Practice Questions

Q1. Consider the following statements about the Goods and Services Tax (GST) in India:

1. The GST Council is a constitutional body established under Article 279A.
2. Decisions of the GST Council require a three-fourths majority, where the Centre has one-third weightage of votes and the States together have two-thirds.
3. The recently introduced GST 2.0 has replaced the four earlier slabs with two rates – 5% and 18% – along with a 40% rate on demerit goods.

Which of the statements given above are correct?

 A. 1 and 2 only
 B. 1, 2 and 3 only
 C. 2 and 3  only
 D. 1 and 3 only

Answer: B (1, 2, and3)

Q2. In the context of GST reforms, what is meant by an “inverted duty structure”?

 A. When the tax on imports is lower than the tax on exports.
 B. When the tax rate on raw materials or inputs is higher than the tax rate on finished goods.
 C. When the tax burden is regressive and falls more on the poor than on the rich.
 D. When the tax on luxury goods is lower than on essential goods.

Answer: B

UPSC Mains Practice Question

Q. “GST 2.0 marks a watershed in India’s tax reforms, but effective implementation is the real challenge.” Discuss the significance of GST 2.0 reforms for inclusive growth in India. Also examine the challenges and suggest the way forward. (250 words)

SOURCE- THE HINDU

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