GST 2.0 Reforms

Context

The 56th GST Council meeting held on September 3, 2025, marked a major step in India’s indirect tax reforms with the introduction of GST 2.0.
These reforms aim to simplify tax structures, reduce compliance burden, and enhance trust between government, industry, and consumers. The changes are considered a historic milestone, potentially transforming how businesses and consumers interact with the tax system.

Key Highlights of GST 2.0

1. Simplified GST Structure
   • Introduction of four slab rates:
     • 5%, 12%, 18%, and 28%
   • 18% set as the standard rate.
   • 40% rate applied only to luxury and sin goods (e.g., tobacco, high-end luxury items).
   • Essential goods and services like household goods, daily necessities, and staples kept under lower tax brackets.
2. Reduction in Consumer Burden
   • Over 65% of goods and services to fall under 0%, 5%, or 12% categories.
   • Only 1% placed in luxury or sin categories.
   • Expected benefits:
     • Lower costs for middle and lower-income families.
     • Boost to consumption and moderate inflation.
3. Focus on MSMEs (Micro, Small & Medium Enterprises)
   • MSMEs to gain from:
     • Lower input costs.
     • Simplified compliance processes.
     • Faster refunds and reduction in delays.
   • Lower capital lock-in and better access to working capital for growth.
4. Technology-Driven Monitoring
   • Greater use of digital tracking, including:
     • AI-based tools to prevent tax evasion.
     • Real-time reporting of transactions.
   • Enhances transparency and accountability.

Challenges Highlighted

• Implementation hurdles:
  • Preventing misuse of tax credits and ensuring businesses pay actual taxes.
  • Need for clarity in classification of goods to avoid disputes.
  • Risk of legal challenges if compliance costs rise for MSMEs.
• Awareness & Training:
  • Virtual and in-person awareness sessions for smooth transition.
  • Clear communication needed to build trust among stakeholders.

Expected Economic Impact

1. Short-Term:
   • Temporary dip in government revenue due to lower tax rates.
   • Businesses adjusting to new systems and rules.
2. Long-Term:
   • Boost to GDP growth by:
     • Increasing consumption.
     • Reducing inflationary pressure.
     • Enhancing compliance and formalization of the economy.
3. Revenue Neutrality:
   • Revenue loss to be compensated through:
     • Higher compliance rates.
     • Expansion of tax base.