Gajendra Singh Godara
Aug 29, 2025
15
mins read
The Goods and Services Tax (GST) transformed India’s indirect tax landscape in 2017 by unifying a fragmented system into “One Nation, One Tax.” Now, India is gearing up for GST 2.0 - a blueprint of next-generation reforms aimed at simplifying the tax structure and strengthening economic resilience. Announced by the Prime Minister, this reform agenda focuses on rate rationalization, structural improvements, and easing compliance to enhance both ease of living for citizens and ease of doing business for industry. By addressing long-standing issues like complex slabs, inverted duty structures, and compliance burdens, GST 2.0 aspires to create a fairer, more transparent indirect tax regime that boosts growth and inclusive development.
Historic Announcement (Aug 2025): In his Independence Day 2025 address, the Prime Minister announced next‑generation GST reforms aka GST 2.0 to be placed before the GST Council, India’s first constitutional federal body for goods and services tax, chaired by the Union Finance Minister, as a Diwali gift to the nation. This marked eight years since GST’s rollout and signaled a major upcoming overhaul by the GST Council meeting in September, with implementation targeted before Diwali 2025.
Table of content
India’s GST 2.0 reform agenda rests on three core pillars designed to transform GST into a driver of growth and good governance. These pillars were articulated in the Finance Ministry’s proposal following the PM’s speech and form the crux of the reform blueprint:
Pillar 1: Structural Reform for Economic Resilience
Correcting Inverted Duty Structures
Correcting inverted duty structure (when GST on inputs exceeds GST on outputs) unlocks input tax credit and reduces refunds.
Free up blocked working capital and reduce production costs.
Support Make in India by making local goods more competitive than imports.
Reducing Classification Disputes
Clear HSN guidance and a functional GST Appellate Tribunal will lower tax compliance costs and caseload with tax authorities.
Build tax certainty to attract investors and improve India’s reliability.
Including Excluded Sectors (Gradual Integration)
Extend GST to petroleum, natural gas, and ATF over time.
Streamline input tax credits and avoid cascading taxes.
Safeguard state revenues with temporary compensation mechanisms.
Legal and Institutional Reforms
Establish GST Appellate Tribunal with regional benches for fast-track dispute resolution.
Clarify GST law on essentials to reduce ambiguity.
Strengthen GST’s institutional backbone, making it more business-friendly.
Economic Resilience & Self-Reliance
Unlock working capital, encourage exports, and boost manufacturing.
Enhance India’s self-reliance and capacity to withstand global economic shocks
Pillar 2: Rate Rationalisation Through Two-Slab System
India’s GST currently has four main rate slabs (5%, 12%, 18%, 28%). GST 2.0 proposes a two‑slab tax regime (5% ‘merit’, 18% ‘standard’) with a high‑rate bucket (~40%) for sin/luxury goods is under consideration by the GST Council to simplify the tax regime.
The Big Shift - From Four to Two Slabs
Current: 5%, 12%, 18%, 28% + cess.
Proposed: 5% (merit rate) for essentials, 18% (standard rate) for most items.
Luxury/sin goods → special ~40% rate (replacing cess).
0% GST continues on unprocessed food, healthcare, and key essentials.
Simplifying the Tax Structure
12% slab → 99% items moved down to 5%.
28% slab → 90% items shifted to 18%.
Result: Easy, two-tier GST + minimal high-rate exceptions.
Legacy levies
Central excise duty may continue on select fuels until any Council‑approved transition, which means some input chains may remain partially outside seamless ITC.
Before vs. After - Rate Structure at a Glance: The table below summarizes the current versus proposed GST rate structure and revenue share:
Current GST Slabs (old regime) | Proposed GST 2.0 Slabs (new framework) |
0% (Exempt) - Essential goods/services | 0% (Exempt) - Unchanged for basic essentials |
5% (Merit Rate) - Lower rate (~7% of GST revenue) | 5% (Merit Rate) - Retained; expanded to cover most items formerly at 12% |
12% (Standard-Mid Rate) - (~5% of revenue) | (Eliminated) - Bulk of 12% items moved to 5% slab |
18% (Standard Rate) - (~65% of revenue) | 18% (Standard Rate) - Retained; will also include ~90% of items from old 28% slab |
28% (Top Rate) - (~11% of revenue) | (Eliminated for most) 28% slab removed except for sin goods. |
Cess on luxury/sin goods - e.g. extra cess on 28% for tobacco, etc. | 40% Sin/Luxury Rate - New high rate on demerit goods (replacing cess) |
Exact GST rates will be notified item-wise; the current vs. proposed mapping below is indicative
Benefits for Compliance & Litigation
Reduced classification disputes, fewer errors.
Lower compliance cost, reduced evasion via misclassification.
Moves closer to “Good and Simple Tax.”
Enabling Bold Reforms (End of Cess Regime)
GST compensation cess ends March 2026.
Surplus funds available to support states in transition.
Two-slab reform fiscally manageable → smoother state acceptance.
Pillar 3: Ease of Living and Business
Seamless, Tech-Driven Compliance
Time‑bound GST registration with risk‑based checks by tax authorities will make entry easier for MSMEs.
Faster, user-friendly online process → reduced bureaucratic delays.
Encourages startups, MSMEs, and new businesses to join the formal system.
Pre-Filled Returns
Auto‑drafted GSTRs from e‑invoicing/e‑waybills reduce mismatches and GST evasion via fake ITC.
Reduces GST notices, audits, and compliance burden.
Faster & Automated Refunds
Rule‑based, system‑driven refunds improve cash flow; Integrated GST (IGST) mechanics remain key for inter‑state supplies
Boosts export competitiveness and signals responsive tax governance.
Reduced Compliance Burden on MSMEs
Tech-driven measures (e-registration, e-returns, e-refunds) → less time & cost.
Simpler GST return forms + higher composition thresholds considered.
Enhances ease of doing business, nurtures entrepreneurship.
Enhanced Transparency & User Experience
“Faceless” GST system: fewer disputes, smooth refunds, simple filing.
E-invoicing reduces cascading of taxes → stable prices.
Benefits citizens via cheaper goods & easier interactions with the GST system.
Digital Oversight to Curb Evasion
Strengthening GSTN platform with AI-based fraud detection & invoice matching.
Honest taxpayers → easier compliance; evaders → harder to cheat.
Improves collections while aligning with “trust-based, technology-driven” tax administration.
Relief for Common Consumers
Lower GST rates on mass‑use goods in the tax regime—if adopted—should reduce prices; anti‑profiteering oversight can track pass‑through..
Direct impact: reduced cost of living, especially for middle-class & poor households.
Long-term effect: better consumption of essentials → improved nutrition & welfare.
Support for Farmers & Agriculture
Agricultural inputs & farm equipment (tractors, pumps, machinery) → reduced from 12%/18% to 5%.
Fertilizers & pesticides remain low-taxed.
Lower costs raise farm productivity & incomes.
Rural consumers benefit from cheaper housing materials & daily goods → reduces rural–urban disparity.
MSMEs and Small Traders
Simpler compliance and faster input tax credit/refunds strengthen working capital.
PM emphasized benefits for startups & MSMEs.
Inclusion into the formal GST net promotes broad-based, inclusive growth.
Addressing Inequality through Tax Policy
Merit rate (5%) on essentials protects poor households.
Luxury/sin goods → ~40% tax rate (cars, tobacco, gambling).
Ensures progressive taxation: lighter burden on poor, heavier on luxury consumption.
Promotes social equity through pro-poor tax design.
Cooperative Federalism in Action
Effective implementation requires Centre–State cooperation via GST Council.
States can safeguard social spending by seeking compensation measures.
Joint decision-making ensures reforms address regional disparities.
Reinforces inclusive growth as a shared national objective.
Stimulus to Growth
Lower prices + easy compliance → boosts consumption, production, and investment.
GST 2.0 acts as a fiscal stimulus, lifting India’s growth trajectory.
Taming Inflation
Lower GST rates on consumer goods → CPI inflation may drop by ~0.4% (40 bps).
Benefits: higher real incomes, stronger demand, monetary policy flexibility for RBI.
Fiscal Considerations
Initial revenue dip: ~50–60 bps decline in GST collections.
Offset by: growth-driven higher tax collections, broader compliance.
Compensation cess expiry (2026) reduces distortions; surplus supports states.
Fiscal deficit impact FY26: <0.1% of GDP → manageable.
Investment & Ease of Doing Business
Simpler, stable GST = positive signal for investors.
Reduces uncertainty, disputes → supports Make in India.
Encourages FDI, domestic expansion, and job creation.
Competitive Domestic Market
Lower costs (input credits + logistics efficiency).
Increased consumer choice, better prices.
Net effect: higher productivity + real income gains.
Supports India’s $5 trillion economy & Viksit Bharat 2047 vision.
Long-Term Formalization Benefits
Encourages MSMEs and small traders to join the formal GST chain.
Expands tax net, improves income reporting & compliance culture.
Formalization → better access to credit, working conditions, and governance benefits.
Consensus and revenue balance
A two‑slab goods and services tax needs broad support in the GST Council; Centre has one‑third voting weight, States two‑thirds, so rate cuts must balance simplification with State revenue protection.
Classification clarity and special rates
Even with fewer GST rates, HSN mapping, exemptions, and special rates (e.g., jewellery/diamonds) can keep disputes alive unless tax authorities issue tight, uniform guidance.
Inverted duty structure and ITC flow
Correcting inverted duty structure should unlock input tax credit, but transition sequencing is vital so refunds don’t spike and MSME working capital isn’t strained.
Technology and taxpayer experience
GSTN upgrades for pre‑filled returns, e‑invoicing, and automated refunds must be stable; without strong helpdesks/APIs, tax compliance costs can rise for small firms.
Transition on the ground (IGST and pricing)
Clear dates for place‑of‑supply under integrated GST, contract re‑pricing, and MRP relabelling are needed to avoid disputes and ensure pass-through of lower GST rates.
Petroleum/ATF and legacy levies
Any phased inclusion of petroleum or aviation turbine fuel into GST requires Council consensus and a pathway for central excise duty/state VAT, or ITC chains will stay blocked.
Economists note that state governments could face revenue losses estimated at ₹7,000–9,000 crore annually.
However, these may be offset by stronger GDP growth, which boosts both direct and indirect tax collection.
For 2025–26, the central government’s fiscal deficit impact is expected to be less than 0.1% of GDP.
S&P Global Ratings has dismissed concerns that the Centre’s proposal to reform the Goods and Services Tax (GST) regime will harm fiscal revenues.
The director of the organisation explained that while tax rates may appear lower under the proposed two-slab system, simplified implementation and transparent accounting could actually improve revenue collection in the long run.
It highlighted that GST has been a key driver of fiscal revenues over the past five to six years.
S&P believes reforms will continue strengthening government finances rather than weakening them, even if short-term adjustments create some pressure.
A Constitutional Federal Body
Established under Article 279A.
Composition: Union Finance Minister (Chair) + State Finance Ministers.
Apex decision-making body for GST reforms → pivotal for GST 2.0 roadmap.
Cooperative Federalism at Work
Centre and States share equal footing in tax policy decisions.
Decisions require 3/4th majority → ensures broad consensus.
GST 2.0 formulated through Group of Ministers (GoM) + Council approval.
For understanding GST council in details do check out this blog: GST Council (Goods and Services Tax Council), Constitutional Provisions, Functions, Way Forward - PadhAI
Q. What is “GST 2.0” in India?
A. GST 2.0 refers to a major reform of India’s Goods and Services Tax, featuring only two main tax slabs (5% and 18%) and various changes to simplify compliance and correct structural issues.
Q. What is the GST Council?
A. The federal decision‑making body for goods and services tax chaired by the Union Finance Minister—with Centre (one‑third) and States (two‑thirds) voting weights; it recommends GST rates, rules, and exemptions.
Q. What is inverted duty structure (IDS) and why is it a problem?
A. IDS is when GST on inputs exceeds GST on output, leading to unutilised input tax credit and refund dependence; fixing IDS improves cash flow and reduces disputes for manufacturers and MSMEs.
Q. How will GST 2.0 benefit the common consumer?
A. Consumers should see lower prices on many goods (as 12%→5% and 28%→18% cuts) and a more transparent, efficient tax system that reduces hidden costs.
Q. What are the key features of the GST 2.0 reform?
A. Key features include merging four GST slabs into two (5% merit and 18% standard rates), eliminating most 12%/28% rates, introducing a ~40% slab for luxury/sin items, fixing inverted duty anomalies, and implementing technology-driven measures like seamless registration, pre-filled returns, and faster refunds to ease compliance.
GST 2.0 represents a watershed moment in India’s journey towards a simpler, more efficient tax system. By building on lessons from the first eight years of GST, these next-gen reforms aim to strike the right balance between simplification and equity - lowering the tax burden on common citizens and businesses while strengthening the overall tax architecture. If implemented well, GST 2.0 could rejuvenate India’s economic momentum by boosting consumption, spurring investment, and enhancing India’s global competitiveness. Equally, it underscores the maturity of India’s cooperative federalism, as the Centre and States come together in the GST Council to script a win-win reform.
The reform path must balance simplification with revenue stability and a careful transition for businesses; practical guidance and strong IT systems will decide early outcomes. Periodic reviews by the GST Council can fine‑tune GST rates, rules, and timelines to course‑correct on revenue, inflation, and compliance.
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