GST 2.0: India’s Next Big Tax Reform

Why in the News?

1. The Government of India is introducing GST 2.0, the most significant reform since GST’s launch in 2017.
2. The reform focuses on simplification, rate rationalisation, and long-term revenue growth rather than immediate collection.
3. It aligns with PM Modi’s vision of creating a streamlined, business-friendly tax framework.

Key Highlights

1. Simplification of Rate Structure
   1. Existing four slabs (5%, 12%, 18%, 28%) replaced by two main slabs: 5% and 18%.
   2. Special rates of 25% and 3% retained, new 40% slab for luxury/sin goods.
   3. 12% category removed, with most goods moving to 5%.
2. Tax Reductions and Exemptions
   1. Out of 506 goods, 90% categories see tax reduction.
   2. 52 items granted full exemption to ease consumer burden.
   3. Higher taxes for luxury consumption ensure progressive taxation.
3. Revenue Impact in Short Term
   20. Revenue likely to fall by ₹48,000 crore, from ₹20.2 lakh crore to ₹19.7 lakh crore.
   21. Effective tax rate dips from 64% to 11.43%.
   22. Reform is based on Laffer Curve logic: lower rates → higher compliance → higher long-term revenues.
4. Institutional and Administrative Reforms
   1. GSTAT (Goods & Services Tax Appellate Tribunal) operationalised for dispute resolution.
   2. Faster refund mechanisms to improve liquidity for exporters.
   3. Simplified registration scheme for low-risk small businesses with tax liability below ₹2.5 lakh per month.
5. Trade, Demographic and Public Health Focus
   1. Export competitiveness enhanced by removing limits on low-value consignments.
   2. Indian intermediaries supplying abroad are now eligible for export benefits.
   3. Higher tax on tobacco, soft drinks, ultra-processed food, online gaming to serve public health and demographic management.

Sector-Specific Impacts of GST 2.0

1. Automobile Sector
   1. Small petrol cars and motorcycles now fall under the 18% GST slab (earlier 28%), making them cheaper.
   2. Small hybrid cars also get the benefit of lower tax, but larger hybrid cars face a new 40% rate.
   3. Electric vehicles (EVs) continue to enjoy a low 5% tax rate, giving certainty to the EV industry.
   4. Dealers face difficulties in clearing old stock, since earlier cess benefits cannot be adjusted, leading to possible short-term losses.
2. Cement and Construction
   1. Cement moves from 28% to 18%, which will bring down costs for housing, real estate, and infrastructure projects.
   2. This makes construction more affordable and helps both public and private projects.
3. Textiles and Fertilisers
   1. Textiles: Man-made fibres and yarns are now taxed at 5%, reducing input costs for the garment industry.
   2. However, some anomalies remain—for example, fabrics at 5% while stitched garments above a certain price attract 18%, which may create confusion.
   3. Fertilisers: Key raw materials for fertilisers now taxed at 5% instead of 18%, lowering input costs for fertiliser companies and helping farmers indirectly.
4. Consumer Goods and Essentials
   1. Many daily-use items such as soap, toothpaste, butter, ghee, and packaged foods are shifted to lower tax rates, making them cheaper.
   2. Home appliances like ACs, dishwashers, and televisions have moved from 28% to 18%, which could boost sales in the consumer durables sector.
   3. Insurance premiums and some education-related items are exempt from GST, reducing household financial burden.
5. Handicrafts, Agriculture and Machinery
   1. Items like handicrafts, marble, and granite now fall under the 5% slab, which will benefit small artisans and local industries.
   2. Agricultural tools such as tractors, drip irrigation equipment, and sprinklers are taxed at 5%, making them more affordable for farmers.
6. Sin Goods and Casinos
   1. Goods considered harmful, such as tobacco, pan masala, and aerated drinks, are now taxed at 40%, ensuring high revenue collection and discouraging over-consumption.
   2. Casinos, especially in states like Goa, face a higher 40% GST, which could reduce visitors and hurt investment in the sector.

Implications

1. Boost to Economic Activity
   1. Simplification reduces compliance costs for businesses.
   2. Encourages formalisation of marginal enterprises.
   3. Greater ease of doing business attracts investment.
2. Revenue Potential in the Long Term
   1. Broader tax base through higher voluntary compliance.
   2. Lower evasion due to streamlined slabs.
   3. Stronger revenue flow once compliance stabilises.
3. Sectoral Impact
   1. Power sector gains from cess removal and rationalisation of coal taxation.
   2. Exporters benefit from quicker refunds and fewer restrictions.
   3. Luxury and sin goods industries face higher tax burdens.
4. Public Policy and Social Benefits
   1. Higher taxes on harmful consumption goods contribute to better health outcomes.
   2. Rationalised structure enhances progressive taxation.
   3. Encourages behavioural shifts in consumption among youth.
5. Fiscal and Market Outcomes
   1. Short-term fiscal deficit pressure due to reduced revenues.
   2. Stabilisation expected with credit rating upgrade and fiscal consolidation.
   3. Markets are likely to regain confidence once growth momentum is visible.

Key Terms

1. GST (Goods and Services Tax)
   1. Definition: GST is a destination-based indirect tax on the supply of goods and services, meaning the tax is collected where the product is consumed, not where it is produced.
   2. Launch in India: Introduced on 1st July 2017, subsuming multiple indirect taxes like VAT, excise, service tax, etc.
   3. Dual Structure: Both Centre and States levy GST simultaneously:
      1. CGST (Central GST): Collected by the Centre.
      2. SGST (State GST): Collected by States.

• IGST (Integrated GST): Collected by Centre on inter-state supply.

1. Constitutional Backing: The GST Council was created under Article 279A, chaired by the Union Finance Minister, with state finance ministers as members.
2. Objective: To create a unified market under the slogan “One Nation, One Tax, One Market” and remove cascading of taxes.

2. Laffer Curve
   1. Concept: An economic theory explaining the relationship between tax rates and government revenue.
   2. Core Idea: At 0% tax, revenue is zero. At 100% tax, revenue is also zero (since nobody will work or report income). The maximum revenue lies somewhere in between.
   3. Policy Relevance: Suggests that very high tax rates may reduce compliance, while moderate rates can expand the tax base and boost collections.
   4. Origin: Developed by American economist Arthur Laffer in the 1970s.
   5. Use in India: The logic behind GST 2.0’s lower slabs—lower rates can bring more businesses into the formal economy, increasing long-term revenue.
3. Progressive Taxation
   1. Definition: A tax system where tax rates rise as income or consumption levels rise.
   2. Principle: Ensures equity—the rich pay proportionally more, the poor pay less.
   3. Example: Income tax slabs in India are progressive.
   4. Benefits: Reduces inequality, helps redistribute wealth, and funds welfare programs.
   5. Contrast: Regressive taxation (like uniform sales tax) burdens the poor more since they spend a higher share of income on consumption.
   6. In GST 2.0: Higher taxes on luxury goods, tobacco, aerated drinks, and online gaming apply the principle of progressivity.
4. Inverted Duty Structure (IDS)
   1. Meaning: Situation where the tax on inputs (raw materials) is higher than the tax on outputs (finished goods).
   2. Problem: Businesses pay more tax on inputs but cannot fully use credits, leading to blocked funds and liquidity issues.
   3. Example: If fabric attracts 12% GST but garments only 5%, textile exporters accumulate unused input tax credits.
   4. Impact: Hurts sectors like textiles, footwear, and exporters by making products less competitive.
   5. Solution: Refund of accumulated credits or correction of duty structure by aligning input and output rates.
5. Fiscal Consolidation
   1. Definition: The process of reducing government’s budget deficit and stabilising debt levels.
   2. Why Important: Helps maintain macroeconomic stability, prevents inflation, and builds investor confidence.
   3. Tools:
      1. Raising revenues (better tax compliance, disinvestment).
      2. Cutting unnecessary expenditure.

• Shifting focus to productive capital expenditure.

1. Institutional Framework in India: Guided by the FRBM Act (Fiscal Responsibility and Budget Management, 2003), which sets targets for fiscal deficit and debt-to-GDP ratio.
2. Global Impact: Strong fiscal consolidation often leads to credit rating upgrades and cheaper borrowing for the government.

Challenges and Way Forward

Conclusion

GST 2.0 represents not just a tax reform, but a strategic investment in India’s long-term economic growth. While short-term revenue losses and implementation hurdles are likely, the reform’s focus on simplification, fairness, and voluntary compliance will strengthen India’s fiscal base. Its success will depend on smooth execution and taxpayer cooperation.