GST 2.0: Towards a Simplified and Citizen-Centric Tax Regime

GST 2.0: Towards a Simplified and Citizen-Centric Tax Regime

Syllabus Mapping:

• GS Paper II – Governance: Constitutional Bodies (GST Council)
• GS Paper III – Economy: Government Policies & Interventions, Growth & Development, Tax Reforms

Introduction

The Goods and Services Tax (GST), hailed as India’s most ambitious indirect tax reform since independence, has entered a new phase with GST 2.0. The 56th GST Council Meeting (September 2025) introduced next-generation reforms aimed at simplification, equity, and growth promotion. By rationalizing tax slabs, cutting rates on essentials, boosting healthcare, agriculture, and renewable energy, and setting up stronger dispute resolution systems, GST 2.0 is positioned to make India’s tax architecture more citizen-centric and development-oriented.

Comparative Table: GST Evolution in India

Aspect	Before GST (Pre-2017)	GST 1.0 (2017-2025)	GST 2.0 (2025 onwards)
Tax Structure & Complexity	Multiple indirect taxes (Excise, VAT, Service Tax, Octroi). High complexity with overlapping Centre & State levies.	Four slabs: 5%, 12%, 18%, 28%. Reduced but still complex due to multiple slabs.	Two slabs – 5% (essentials), 18% (standard); 40% (demerit goods). Simplified, predictable & citizen-centric.
Healthcare	No uniform exemption.	Limited exemptions on a few drugs.	Full exemption on life & health insurance; life-saving drugs at Nil rate.
Agriculture	Different state taxes on agri-inputs.	Higher tax rates on fertilizers & machinery.	Reduced rates (fertilizers, tractors, composters at 5%).
Industry & Manufacturing	Cascading effect of taxes.	Uniform GST → better integration.	Rate cuts on consumer durables, cement, auto parts boost to demand.
Governance	No uniform body.	GST Council under Art. 279A.	GST Council + GSTAT (Appellate Tribunal for dispute resolution).
Revenue Collection	Fragmented, leakage-prone.	1.5-1.6 lakh crore/month average.	Record 1.84 lakh crore/month (2024-25).
Federalism	States had tax autonomy.	States dependent on compensation cess.	Greater need for consensus, states’ concerns over revenue losses.

Stakeholder Impact of GST 2.0

Consumers:

Cheaper insurance, healthcare, food items, consumer durables. Relief in household expenditure, better purchasing power.

Farmers & Rural Sector:

Lower cost of tractors, fertilizers, agri-inputs → enhanced productivity. Boost to handicrafts & rural employment.

MSMEs & Industry:

Reduced tax burden on inputs & finished goods. Predictable tax regime, simplified refunds → encourages formalization.

Healthcare Sector:

Nil GST on life-saving drugs & health insurance accessible healthcare. Indirect boost to India’s pharma & medical device industry.

Government (Centre & States):

Higher compliance, transparency, and wider tax base. Revenue-sharing tensions may persist, requiring cooperative federalism.

Key Reforms under GST 2.0

1. Structural Rationalization

Earlier: Four major GST slabs (5%, 12%, 18%, 28%).

Now:

• 5% (merit rate): Essentials.
• 18% (standard rate): Most goods & services.
• 40% (demerit rate): Luxury & sin goods (tobacco, pan masala).

Impact: Simplifies compliance, reduces classification disputes, and aligns with global best practices (OECD norms).

2. Relief for Citizens

• Healthcare & Insurance: Life and health insurance now fully exempt.
• Food Basket: UHT milk, paneer, breads → Nil GST.
• Renewables: Devices like solar panels & wind equipment taxed at 5% (down from 12%).

Impact: Supports household savings, healthcare affordability, and green transition.

3. Boost to Industry & Manufacturing

• Consumer durables (cars, TVs, ACs, cement, auto parts): 28% → 18%.
• Renewable energy devices: 12%→5%.

Expected to stimulate demand, enhance domestic manufacturing, and attract investment under Make in India.

4. Healthcare Access

• 33 life-saving drugs → 12% to Nil.
• Cancer & rare disease drugs → 5% to Nil.

Aligns with SDG 3 (Good Health & Well-being) and reduces out-of-pocket expenditure.

5. Agriculture & Rural Support

• Tractors, harvesters, composters: 12% → 5%.
• Fertilizer inputs (sulphuric acid, nitric acid, ammonia): 18% → 5%.
• Labour-intensive goods (handicrafts, leather, marble): 12%→5%.

Strengthens farm mechanization, rural employment, and exports of handicrafts.

6. Institutional & Procedural Reforms

• GSTAT (Goods & Services Tax Appellate Tribunal): Operational by Dec 2025 for speedy dispute resolution.
• Streamlined refund & registration systems → Less litigation, improved predictability for MSMEs.

GST in Perspective

Constitutional & Structural Foundations

101st Constitutional Amendment Act, 2016 (effective 1 July 2017): Legal foundation for GST in India, replacing a complex web of central and state indirect taxes.

Key Articles Introduced:

• Article 246A: Special provision empowering both Centre & States to levy GST.
• Article 269A: Provides for levy and collection of IGST on inter-State trade, to be apportioned between Centre and States.
• Article 279A: Established the GST Council, chaired by Union Finance Minister, with State finance ministers as members → institutionalises cooperative federalism.
• Article 270: Specifies distribution of GST revenue between Centre and States.

Achievements So Far

• Revenue Growth: Record collection (2024-25): ₹22.08 lakh crore gross, average ₹1.84 Lakh crore/ month, reflecting improved compliance.
• Widened Tax Base: Increased registration of businesses, bringing informal enterprises into the tax net.
• Improved Compliance: E-invoicing, e-way bills, and AI-driven audits have reduced tax evasion.
• GDP Growth Impact: NITI Aayog estimates GST has added +1.5-2% to GDP growth by reducing inefficiencies and boosting ease of doing business.
• Exports Competitiveness: Zero-rating of exports ensures Indian goods are more competitive globally.
• Ease of Doing Business: Simplified “One Nation, One Tax” regime reduced cascading effect of taxes.

GST Council: Apex decision-making body; ensures uniformity of rates, exemptions, and rules. Decisions taken by three-fourth majority (Centre 1/3rd weight, States 2/3rd weight).

GST Network (GSTN): IT backbone for filing returns, payments, and compliance; enables digital governance.

Threshold Exemption: Small businesses with turnover below ₹20 lakh (₹40 lakh for goods in some states) exempt → protects micro enterprises.

Analytical Perspective

• Political Economy: GST represents a shift of fiscal powers from states to a shared Centre-State mechanism a unique experiment in India’s federalism.
• Technology Integration: One of the world’s largest tax digitalization projects, involving over 1.3 crore registered taxpayers.
• Global Context: India joins 160+ countries with a GST/VAT system, but remains distinct due to dual GST model (CGST + SGST + IGST).
• Symbolic Significance: GST is a landmark of India’s economic integration post-1991 reforms, comparable to currency unification in the EU.

Significance of GST 2.0

1. Economic Dimension

Boost to Domestic Demand: Rate cuts on consumer durables, cement, and auto parts reduce costs, stimulating middle-class consumption.

Industrial Competitiveness: Rationalized rates and reduced tax cascading lower production costs, making Indian goods globally competitive.

MSME Growth: Simplified compliance and reduced litigation via GSTAT provide predictability for small businesses.

Example: Record GST collections of ₹22.08 lakh crore in 2024-25 show improved compliance and tax buoyancy.

2. Social Dimension

Healthcare Relief: Exemption of life/health insurance and life-saving drugs reduces out-of-pocket expenditure, which currently forms ~60% of India’s healthcare spending.

Support to Farmers & Artisans: Lower GST on tractors, fertilizers, handicrafts, and leather enhances rural income and employment generation.

Equity in Taxation: By lowering the burden on essentials, GST 2.0 makes taxation more progressive and inclusive.

3. Environmental Dimension

Renewable Energy Push: Reduction in GST on solar panels and wind equipment (from 12%→5%) incentivizes adoption of green technology.

Climate Commitments: Supports India’s pledge under COP28 & Paris Agreement to achieve Net Zero by 2070.

Circular Economy Boost: Lower taxation on labour-intensive goods (handicrafts, marble) indirectly encourages sustainable, localised production.

4. Governance Dimension

Simplified Compliance: Two-rate structure (5% and 18%) reduces classification disputes (e.g., earlier “Roti vs. Paratha” GST confusion).

Cooperative Federalism: Strengthens Centre-State fiscal dialogue via GST Council under Article 279A.

Rule of Law: Operationalisation of GST Appellate Tribunal (GSTAT) ensures faster dispute resolution and reduces litigation backlog.

5. Global Context

Convergence with Global Standards: Brings India closer to the OECD VAT/GST model, improving international investor confidence.

FDI Magnet: Predictable tax regime complements Ease of Doing Business and Atmanirbhar Bharat.

Comparative Lens: Unlike Malaysia (which repealed GST in 2018 due to inflation), India’s GST 2.0 adopts a phased, consensus-driven approach.

Challenges Ahead in GST 2.0 Implementation

1. Revenue Concerns

Issue: Rate cuts on consumer durables, fertilizers, and essential goods may reduce tax inflows in the short run.

Example: States like Punjab and Kerala have already expressed concerns about falling revenues post-COVID when compensation cess ended in June 2022.

Risk: Strain on fiscal balance and possible widening of the fiscal deficit if compliance gains don’t offset losses.

2. Centre-State Dynamics (Federalism)

Issue: States may perceive GST 2.0 as limiting their fiscal autonomy since rate-setting lies with the GST Council.

Example: Tamil Nadu and West Bengal have frequently raised concerns about being forced into uniformity, affecting federal flexibility.

Risk: Erosion of trust in cooperative federalism if compensation and revenue-sharing are not transparent.

3. Implementation & Institutional Capacity

GSTAT Functioning: For dispute resolution, GSTAT must become fully functional by Dec 2025.

Digital Infrastructure: Frequent glitches in the GSTN portal (especially for MSMEs during peak filing months) still undermine compliance.

Human Resources: Need for better trained officers to manage refund processes and curb fake invoicing.

4. Inflationary & Transitional Pressures

Issue: Rationalization of rates may initially lead to price volatility, especially in the auto, cement, and FMCG sectors.

Example: Malaysia repealed its GST in 2018 after public backlash against inflationary impact.

Risk: Political opposition if reforms are perceived as anti-consumer in the short term.

5. Compliance & Informal Sector Inclusion

Issue: A large part of India’s economy (~40%) still lies in the informal sector.

Challenge: Bringing small traders into the GST net without overburdening them.

Risk: Informal leakages may continue, reducing tax buoyancy.

6. Litigation & Trust Deficit

Despite reforms, classification disputes (e.g., “Paratha vs. Roti” case on GST rates) highlight interpretational issues. If not resolved quickly, litigation may pile up, affecting business confidence.

Way Forward for GST 2.0

1. Capacity Building & Digital Literacy

Problem: Small businesses and MSMEs often struggle with compliance due to lack of awareness.

Solution:

• Regular training workshops for GST officials and traders.
• Simplified compliance manuals in regional languages.

Example: Singapore’s GST regime provides extensive digital training to SMEs.

2. Technology-Driven Compliance

Problem: Manual compliance creates room for errors, fake invoicing, and tax evasion.

Solution:

• AI-driven monitoring, e-invoicing, blockchain-based tracking of supply chains.
• Use of big data analytics to detect evasion patterns.

Example: Brazil uses AI in tax compliance, significantly reducing leakages.

3. Cooperative Federalism & Revenue Sharing

Problem: States fear fiscal dependency on Centre.

Solution:

• Timely release of GST compensation.
• Empower states with greater say in GST Council decisions.
• Regular Centre-State fiscal dialogues to reduce mistrust.

4. Inclusive & Regional Development

Problem: GST often seen as neutral to regional inequalities.

Solution:

• Use differential GST incentives to promote industries in under-developed states (e.g., NE states, Bihar).
• Special tax rebates for labour-intensive sectors like textiles and handicrafts.
• Helps align GST with Atmanirbhar Bharat and Make in India.

5. Independent Oversight & Impact Assessment

Problem: Lack of independent evaluation creates opacity.

Solution:

• Establish a GST Review Commission under CAG/NITI Aayog.
• Conduct biennial GST impact studies on inflation, compliance, and revenue.
• Publish reports for public transparency → builds trust in tax reforms.

6. Global Benchmarking

Problem: India’s GST still more complex compared to OECD countries.

Solution:

• Learn from Canada’s federal GST model (harmonized with provinces).
• Avoid pitfalls like Malaysia’s GST rollback (2018) due to inflationary pressure.
• Benchmark Indian GST reforms with global VAT/GST efficiency ratios.

Conclusion

GST 2.0 is not just a tax reform but an instrument of inclusive growth. By rationalizing slabs, easing compliance, and focusing on healthcare, agriculture, and renewable energy, it has the potential to strengthen India’s developmental journey. However, ensuring fiscal stability, cooperative federalism, and robust implementation will be the real test of its success.

Practice Questions

Prelims

1) Consider the following items: (2018)

1. Cereal grains hulled
2. Chicken eggs cooked
3. Fish processed and canned
4. Newspapers containing advertising material

Which of the above items is/are exempted under GST (Good and Services Tax)?

(a) 1 only
(b) 2 and 3 only
(c) 1, 2 and 4 only
(d) 1, 2, 3 and 4

Answer: (c)

2) What is/are the most likely advantages of implementing ‘Goods and Services Tax (GST)’? (2017)

1. It will replace multiple taxes collected by multiple authorities and will thus create a single market in India.
2. It will drastically reduce the ‘Current Account Deficit’ of India and will enable it to increase its foreign exchange reserves.
3. It will enormously increase the growth and size of the economy of India and will enable it to overtake China in the near future.

Select the correct answer using the code given below:

(a) 1 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3

Answer: (a)

3) With reference to GST 2.0 reforms (2025), consider the following statements:

1. GST 2.0 has replaced the four-slab structure with a two-slab structure along with a demerit rate.
2. Life insurance and health insurance policies are now fully exempt under GST.
3. Fertilizer inputs such as sulphuric acid and ammonia are now taxed at 12% under GST.

Which of the statements given above is/are correct?

(a) 1 and 2 only
(b) 2 only
(c) 1, 2 and 3
(d) 1 only

4) Which of the following goods has/have been moved to the Nil GST category under GST 2.0?

1. UHT milk and paneer
2. Life-saving cancer drugs
3. Renewable energy devices
4. Indian breads (roti, paratha)

Select the correct answer:

(a) 1, 2 and 4 only
(b) 1 and 3 only
(c) 2 and 3 only
(d) 1, 2, 3 and 4

5) Consider the following pairs:

Sector – Reform under GST 2.0

1. Agriculture – Fertilizer inputs taxed at 5%
2. Healthcare – 33 life-saving drugs exempted
3. Manufacturing – Cement moved from 28% to 18%

Which of the pairs given above are correctly matched?

(a) 1 and 2 only
(b) 2 and 3 only
(c) 1, 2 and 3
(d) 1 only

Mains Practice Questions

1. “GST 2.0 is not just a tax reform but an instrument of inclusive growth.” Discuss in the context of healthcare, agriculture, and MSMEs.
2. Critically examine how GST 2.0 seeks to simplify India’s tax regime while balancing the twin goals of revenue generation and welfare promotion.
3. The success of GST 2.0 depends on cooperative federalism and technology-enabled compliance. Analyze with suitable examples.
4. Examine the significance of GST 2.0 in boosting India’s industrial competitiveness and renewable energy adoption. How does it align with Atmanirbhar Bharat?
5. GST 2.0 promises predictability for businesses through the GST Appellate Tribunal and dispute resolution mechanisms. Do you think this will reduce litigation and enhance ease of doing business in India?
6. Critically analyze the significance of GST 2.0 reforms in India’s economic growth and social development. How can these reforms balance the twin goals of revenue generation and welfare promotion?
7. Explain the rationale behind the Goods and Services Tax (Compensation to States) Act of 2017. How has COVID-19 impacted the GST compensation fund and created new federal tensions? (2020)
8. Enumerate the indirect taxes which have been subsumed in the Goods and Services Tax (GST) in India. Also, comment on the revenue implications of the GST introduced in India since July 2017. (2019)