GST 2.0 Reforms

GS – III – Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

Why in news?

In the 56^th GST Council meeting, chaired by Union Finance Minister, the Next-Gen Goods and Services Tax (GST) reforms have been approved.

What are the features of current GST 1.0?

Launch – GST, indirect tax structure, was launched with in 2017 by the Constitution 101st Amendment Act 2016.
GST was born out of subsuming of 17 taxes and 13 cesses levied by the Central and State governments.
Tax Slabs - Apart from zero-rated goods, it had four tax slabs 5%, 12%, 18 and 28%.
GST Council - The GST Council is a joint forum of the Centre and the States which makes recommendations to the Union and the States on GST.
Decision taking - Every decision of the GST Council is taken at its meeting by a majority of not less than 3/4th of the weighted votes of the Members present and voting.
Features of GST -
- Destination-based tax
- Eliminated cascading of taxes (tax on tax)
- Created a single national market with common rates and procedures
- Input tax credit
- Completely automated and faceless administration with all processes being online.

What is the performance of GST so far?

Expansion of Tax Base - GST taxpayer base has grown from 66.5 lakh in 2017 to 1.51 crore in 2025, reflecting greater formalization of the economy.
Record Revenue Growth - FY 2024–25 saw Rs.22.08 lakh crore in gross GST collections, doubling in just four years with a CAGR of 18%.
Economic Confidence - Rising collections and active taxpayers reflect stronger compliance, improved systems, and robust economic fundamentals.
Average monthly collections have risen to Rs. 2.04 lakh crore year from Rs. 82,000 crore in 2017–18.

What are the features of GST 2.0?

Next-Gen GST reforms – It builds on GST’s success with a simplified 2-tier structure, fairer taxation, and digital filing for ease and faster refunds.
Focus – It focuses on improving the lives of the common man and ensuring ease of doing business for all, including small traders and businessmen.

Ministry

Two slabs - GST is simplified into a two-slab structure - Slab 1 – 5%, Slab 2 – 18%.
Household essentials - GST reforms cut taxes on household essentials (soaps, toothpaste, Indian breads) to 5% or Nil boosting affordability
Home Building & Materials - The cut in GST on cement (from 28% to 18%) and construction materials like marbles, granites, wooden flooring, etc. cuts from 12% to 5%.
Health care sector - Life-saving drugs, medicines reduced from 12% to Nil or 5% making healthcare affordable
Agriculture Sector - Farm machinery, irrigation equipment cut from 12% to 5%, reducing farming costs
Service sector - Lower GST will reduce costs for citizens and gives a fillip to the hospitality and service industries.
For hotels the cuts from 12% to 5%; Gyms, salons, barbers, yoga GST cut from 18% to 5%.
Toys, Sports & Handicrafts - Reduction of GST rate on manmade fibre from 18% to 5% and manmade yarn from 12% to 5% and for Wooden/metal/textile dolls & toys from 12% to 5%.
Luxury items and sin goods - Tobacco, pan masala, aerated drinks, and luxury goods taxed at 40%.

GST slab

What are the potential benefits GST 2.0 reforms?

Virtuous cycle - The Next-Generation GST reforms are designed not just to reduce tax rates, but to create a virtuous cycle of growth.
Lower Prices, Higher Demand - Cheaper goods and services increase household savings and stimulate consumption.
Support for MSMEs - Reduced rates on inputs like cement, auto parts, and handicrafts lower costs and make small businesses more competitive.
Disputes Reduction- A two-rate structure means fewer disputes, quicker decisions, and simpler compliance.
Wider Tax Net - Simpler rates encourage compliance, expanding the tax base and improving revenues.
Support for Manufacturing - Correcting inverted duty structures boosts domestic value addition and exports.
Economic Momentum - Lower costs leads to higher demand which creates larger tax base and stronger revenues leading to sustainable growth.
Social Protection - Exemption of GST on insurance and essential medicines strengthens household security and access to healthcare.

What are the challenges in implementing GST 2.0?

Effects on poor and middle class - Two-thirds of the total GST, i.e. 64%, comes from the pockets of the poor and the middle class, but only 3% GST is collected from billionaires.
Impact on Center-State Relations - A key demand of the states, made in the true spirit of cooperative federalism, the extension of compensation for another five years to fully protect their revenues, remains unaddressed.
Revenue Impact - The rate rationalization is expected to lead to a short-term dip in revenue for both the central and state governments.
The State of Kerala has said that it will lose upto Rs 8,000–10,000 crore annually under the new slabs.
Technical and Procedural Hurdles – The system continues to face technical issues in GSTN portal during peak hours, the frequent changes in return formats can also be confusing for taxpayers,.
Sector-Specific Challenges - For example, while the automotive and consumer durables sectors will likely see a boost from lower tax rates, other sectors like coal may face increased costs due to a higher GST rate.
Passing on Benefits to Consumers - With the anti-profiteering provisions having expired, there's no legal mandate for businesses to pass on the savings from reduced tax rates directly to the end consumer.

What lies ahead?

Robust IT Infrastructure - Upgrade GSTN systems to handle new rate structures and enable real-time invoice matching and simplified credit note issuance.
Public Awareness & Stakeholder Engagement - Launch nationwide campaigns to educate consumers and businesses on benefits and changes.
Monitoring & Feedback Mechanisms - Set up dashboards to track compliance, refund timelines, and dispute resolution.
Use analytics to identify bottlenecks and areas needing policy tweaks.
Boosting Consumption & Inclusion - Lower taxes on essentials and insurance will increase affordability, especially for middle- and lower-income households.

Conclusion:

The adoption of a simplified GST structure and wide-ranging rate reductions marks a new chapter in India’s tax journey.
By focusing on affordability for citizens, competitiveness for businesses, and transparency in compliance, these reforms make GST not just a tax system, but a catalyst for inclusive prosperity and economic transformation.

Reference

1. NDTV | New GST slabs