New GST Reforms in India: Need for GST 2.0, Tax Slabs, Reclassification of Items

Context:

• The Justice Kurian Joseph Committee on Union-State Relations released a landmark report advocating for GST 2.0.
• The report warns that the current GST framework has eroded the fiscal autonomy of States and needs a second generation of reforms to restore the federal balance and fix the broken digital tax backbone.

Recent GST Reforms in India 2025

• Next Generation GST Reforms (2025): Announced by the Prime Minister on August 15, 2025, to simplify the tax structure further.
• Three-Tier Rate Structure: In September 2025, the GST Council approved a transition to a simplified three-slab system: 5%, 18%, and 40%.
• Threshold Revisions: The tax-free threshold for apparel and footwear was raised to ₹2,500 (from ₹1,000) to provide relief to lower-income consumers.
• Micro-Classification Rationalization: Incoherent tax differences (like different rates for plain vs. packaged buns) were eliminated to reduce the absurdity in tax administration.
• Compensation Extension: While the revenue guarantee for states ended in 2022, the Compensation Cess was extended until March 31, 2026, primarily to service Union borrowings taken during the pandemic.

Reduction of Slabs

• Previous slabs: 0.25%, 3%, 5%, 12%, 18%, 28% + cess.
• New slabs: <1% (for precious stones etc.), 5%, 18%, and 40% ‘sin tax’.
• 12% and 28% slabs eliminated.

Reclassification of Items

• 99% of items in 12% slab → shifted to 5% slab.
• 90% of items in 28% slab → shifted to 18% slab.
• Only 5–7 items (tobacco, gutka, luxury goods) to remain under 40% sin rate.

Impact on Consumption & Revenue

• Lower rates are expected to boost consumption, reduce tax evasion, and widen the tax net.
• Although revenue may dip initially, higher compliance and consumption are likely to raise revenues later.

Relief on Aspirational Items

• Proposal to reduce GST on items like air conditioners, white goods (currently at 28%) to 18% →, making them more affordable.

Ease of Compliance

• Use of technology to simplify GST registration.
• Pre-filled returns to reduce errors and mismatches.
• Faster refunds to improve cash flow for businesses.

Overall Aim

• To implement a simpler, next-generation GST system.
• Promote ease of living and ease of doing business.
• Expected to be deliberated in the GST Council meeting (Sept–Oct 2025) and rolled out within this financial year.

About GST (Goods and Services Tax)

• Introduced: 1st July 2017, replacing multiple indirect taxes (VAT, excise, service tax, etc.).
• Nature: A destination-based, comprehensive indirect tax levied on the supply of goods and services across India.
• Structure:
  • CGST (Central GST) – collected by the Centre.
  • SGST (State GST) – collected by the States.
  • IGST (Integrated GST) – collected on inter-state supplies & imports.
• Key Features:
  • “One Nation, One Tax, One Market.”
  • Dual model – Centre and States share powers.
• The Input Tax Credit (ITC) mechanism avoids cascading taxes.

Need for GST 2.0

• Fiscal Cliff for States: Since the compensation guarantee expires in 2022, States like Punjab and Kerala face revenue shortfalls of 36% to 50%, yet they lack the power to adjust rates to meet local needs.
• Broken Digital Architecture: The original digital handshake (invoice matching) failed. The current reliance on self-declared GSTR-3B returns has led to massive fraud and an unsettled IGST black box.
• Union Veto in GST Council: The current voting weight (1/3rd for Union, 2/3rd for States) gives the Union a de facto veto, turning a federal negotiation forum into an appendage of the Union Executive.
• Erosion of Legislative Autonomy: Under GST, State Assemblies have lost control over 44% of their own tax revenue, reducing elected legislatures to mere passive ratifiers of executive decisions.
• Compliance Burden on MSMEs: GST has relocated complexity from the state to the market. Small firms now spend significantly more time and money on compliance compared to large enterprises.

Way Ahead

• Reforming Voting Weights: Reduce the Union’s vote share to 20% or move to a one-member, one-vote model to treat the Union as an equal partner rather than a dominant promoter.
• Rotational Chairpersonship: Rotate the GST Council Chair every year among the Union and State Finance Ministers (following the EU model) to democratise the agenda-setting process.
• Limited Rate Flexibility: Allow States to vary their SGST component within a narrow band (e.g., +/- 2%) to provide them with fiscal agency during local crises.
• Decentralizing GSTN: Transition the GST Network to a federated architecture (like UPI), allowing States to build their own front-end portals for better data access and audit.
• Independent Dispute Authority: Establish a GST Dispute Settlement Authority chaired by a retired Supreme Court judge to resolve Union-State fiscal conflicts neutrally.

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