GST 2.0 – Rate Rationalisation and Structural Reforms

GST 2.0 Latest News

• The Goods and Services Tax (GST), India’s landmark indirect tax reform launched in July 2017, has undergone multiple tweaks.
• The latest round of reforms, effective September 22, 2025, termed “GST Bachat Utsav” by the Prime Minister of India, aims at simplifying the rate structure.
• This will resolve classification disputes, correct inverted duty structures, and boost household consumption.

Key Features of GST 2.0

• Rate rationalisation: 
  • Transition from a 4-slab system (5%, 12%, 18%, 28%) to a 2-slab system – 
    • Merit rate: 5% (516 items, mostly food items, agricultural machinery, medical devices).
    • Standard rate: 18% (640 items, industrial goods, small cars, bikes).
• Special slabs:
  • 0.25% for rough diamonds, semi-precious stones.
  • 1.5% for cut and polished diamonds.
  • 3% for precious metals like gold, silver, pearls.
  • 40% for sin/de-merit goods like pan masala, tobacco, aerated beverages, yachts, luxury cars.
  • 12% slab abolished, except for bricks (retained under special composition scheme).
• Services covered: Exemptions and cuts – 
  • Life and health insurance – exempted from GST (earlier 18%).
  • Hotels with per day tariff rate of below or equal to Rs 7,500 have seen a cut in GST rate to 5% without ITC (input tax credit) from 12% with ITC earlier.
  • Salons, spas, wellness services – reduced from 18% to 5%.
• Passing benefits to consumers:
  • The Finance Ministry has asked its officers in the field to compile monthly data reports on price change of commodities pre and post-GST rate rationalisation. 
  • These reports will be compiled by the Ministry for the next six months in a bid to ensure that the benefits get passed on to the consumers.

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Economic Rationale of GST 2.0

• Boost to household consumption:
  • Lower GST rates are expected to increase disposable income, spur demand, and incentivise investments.
  • The government aims to offset revenue loss from cuts on over 375 items through higher consumption.
• Correcting Inverted Duty Structure (IDS):
  • IDS occurs when the input tax rate (on raw materials or services) is higher than the output tax rate (on the finished product), leading to capital blockage. 
  • Example: If textile fabric attracts a 12% GST (input tax), but the finished garments attract only an 5% GST (output tax), this creates an IDS.
  • Relief provided by aligning many inputs and outputs into the same slab.

Implementation and Compliance Reforms

• Simplified registration – more technology-driven and time-bound.
• Pre-filled returns to minimise manual errors and mismatches.
• Automated refund process for exporters and IDS cases.
• Amendment to CGST Act 2017 (Section 54(6)): This will provide for 90% provisional refund for IDS cases, similar to zero-rated supplies.

Challenges

• Revenue concerns: For Centre and States despite expected consumption boost.
• IDS issues: Persist in bicycles, tractors, fertilisers, textiles, corrugated boxes, etc.
• Enforcement gap: No legal provision to prevent profiteering, reliance on monitoring only.

Way Forward

• Address residual IDS issues and ensure benefit transfer to consumers through stricter anti-profiteering mechanisms.
• Strengthen state finances via improved compliance and digital monitoring.
• Periodic slab reviews to maintain balance between revenue neutrality and ease of business.
• Enhance trust-based compliance by sustaining tech-enabled registration, return filing, and refunds.

Conclusion

• GST 2.0 marks a major restructuring of India’s indirect tax regime, focusing on simplification, boosting consumption, and improving compliance. 
• While it promises relief to households and businesses, addressing challenges will determine the long-term success of these reforms.

Source: IE