Why in News: The 56th meeting of the GST Council (September 3, 2025) marks a defining milestone in India’s taxation history. GST 2.0 moves beyond rate changes and represents a structural reform towards simplicity, fairness, and growth orientation.
Key Features of GST 2.0
1. Simplified Rate Structure
- Transition from 4-slab system (5%, 12%, 18%, 28%) → 2-rate structure:
- Standard Rate: 18%
- Merit Rate: 5%
- De-merit goods: 40% (selected items like tobacco, luxury sin goods).
- Improves predictability, reduces disputes, and enhances ease of doing business.
2. Relief to Households
- 5% GST on daily essentials: soap, shampoo, toothpaste, bicycles, kitchenware.
- Exemptions: UHT milk, paneer, chapati, paratha.
- Food items: Packaged foods, noodles, chocolates, beverages see rate cuts.
- Boosts consumption and relieves middle- and lower-income groups.
3. Insurance and Healthcare Reforms
- Full exemption on life and health insurance → affordable coverage, higher penetration, especially for senior citizens and low-income families.
- Major exemptions for essential drugs, devices, and treatments (cancer, rare diseases, chronic conditions).
- Expands healthcare access and reduces out-of-pocket expenditure.
4. Agriculture and Farmers’ Welfare
- Farm machinery & tractors: 5% GST.
- Fertilizers & inputs: reduced from 18% → 5%.
- Corrects inverted duty structure, lowers cultivation costs, improves farm productivity.
5. Labour-Intensive and Traditional Sectors
- GST cuts for handicrafts, marble, granite, leather goods.
- Supports traditional industries, safeguards livelihoods, and generates employment.
6. Critical Sectors Rebalanced
- Textiles: GST on man-made fibre and yarn reduced to 5% → removes long-standing distortions.
- Cement: reduced from 28% → 18%, spurring housing and infrastructure growth.
- Renewable energy & auto components: lower rates, promoting green transition.
- Hospitality & wellness services: rationalised rates.
7. Institutional Strengthening
- GST Appellate Tribunal (GSTAT) operational by year-end → faster dispute resolution, consistent rulings, and enhanced taxpayer trust.
- Process reforms: provisional refunds, risk-based compliance checks, harmonised valuation rules.
8. Phased Implementation
- Effective from September 22, 2025 with sequenced rollout → ensures revenue stability while passing benefits to citizens and industry.
Significance of GST 2.0
1. Citizen-Centric Reform
- Direct impact on households via lower prices of essentials and healthcare affordability.
- Enhances insurance penetration and social security.
2. Economic Growth and Investment
- Simplification boosts investor confidence.
- Reduced rates stimulate demand and consumption.
- Export competitiveness in textiles and labour-intensive sectors enhanced.
3. Agricultural Competitiveness
- Lower costs for farmers → improved rural incomes.
- Strengthens food security and agrarian sustainability.
4. Infrastructure and Green Growth
- Cement duty cut → housing multiplier effects.
- Renewable energy and auto components boost India’s green transition.
5. Governance and Institutional Maturity
- GSTAT as a dispute resolution mechanism improves tax certainty.
- Risk-based compliance reduces harassment and improves taxpayer trust.
Challenges Ahead
- Revenue Stability: Need to balance lower rates with fiscal health.
- Implementation Capacity: Harmonisation across states remains critical.
- Awareness & Transition: Industry and small taxpayers need clarity during the shift.
- State Finances: States may fear revenue shortfall; compensation issues must be addressed.
- Tax Base Expansion: Informal sector and digital economy inclusion is key.
Way Forward
1. Strengthen Cooperative Federalism: Ensure Centre–State collaboration on revenue sharing and compliance monitoring.
2. Digitalisation of GST Processes: Enhance transparency, real-time analytics, AI-driven fraud detection.
3. Regular Review Mechanism: Periodic slab rationalisation to maintain equity and efficiency.
4. Capacity Building: Training for businesses, MSMEs, and tax officials to smoothen transition.
5. Socially Just Taxation: Safeguard essentials, healthcare, and education from high burdens.
Conclusion
GST 2.0 represents more than a tax reform — it is a “people’s reform”. By simplifying structures, correcting distortions, lowering rates on essentials, supporting farmers, and boosting critical sectors, it lays a robust foundation for India’s growth journey.
UPSC Relevance
GS Paper 3 (Economy):
- Tax reforms, ease of doing business, investment climate.
Mains Practice Questions
Q1 Discuss the significance of GST 2.0 in strengthening cooperative federalism and building trust between Centre and States. How does it reflect institutional maturity in India’s tax governance?
