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Introduction

Introduced in 2017, the Goods and Services Tax (GST) unified India’s indirect tax system. The recent GST 2.0 reforms bring two-rate simplification, exemption for essentials, correction of distortions, and operationalisation of GSTAT. Together, they seek to enhance efficiency, equity, and inclusiveness, aligning taxation with economic growth and social justice.

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Key Structural Reforms Introduced in GST 2.0

• Two-Rate Simplification: GST 2.0 replaces multiple slabs with just two main rates (18% Standard and 5% Merit) along with a 40% demerit rate for select goods.
  Eg: Soap, shampoo, toothpaste, and bicycles moved to 5%, reducing compliance burden and aligning with global best practices.
• Exemption of Essential Services: Complete exemption of GST on life and health insurance, and on essentials like UHT milk, paneer, and chapati.
• Correction of Inverted Duty Structures: Long-pending distortions in textiles, fertilizers, and auto parts were corrected, restoring efficiency in value chains.
  Eg: GST on man-made fibre reduced to 5%, boosting competitiveness in textiles and exports.
• Boost to Agriculture and Labour-Intensive Sectors: Lower GST for tractors, fertilizers, handicrafts, and leather goods reduces costs and protects jobs.
  Eg: Fertilizer GST cut from 18% to 5% lowers cultivation costs, enhancing farm productivity.
• Institutional Reform – GSTAT Operationalisation: Announcement of the Goods and Services Tax Appellate Tribunal (GSTAT) ensures speedy dispute resolution.

Balancing Equity, Inclusiveness with Efficiency and Productivity

• Equity through Lower Tax on Essentials: By exempting basic food and lowering rates on daily-use goods, GST 2.0 ensures relief for all income groups.
  Eg: Kitchenware and soaps at 5% reduce household expenses, promoting fairness in taxation.
• Inclusiveness via Social Security Boost: Removing GST on life and health insurance expands coverage for vulnerable groups.
  Eg: Senior citizens benefit from cheaper insurance, enhancing inclusiveness in healthcare access.
• Efficiency through Duty Correction: Addressing inverted duty structures enhances productivity in key industries.
• Productivity through Infrastructure Support: Lower GST on cement strengthens housing and infrastructure growth, creating multiplier effects across the economy.
  Eg: Cement rate cut from 28% to 18% reduces construction costs, aiding both industry and citizens.
• Inclusiveness for Farmers and Workers: Lower rates on farm inputs and traditional industries safeguard rural livelihoods while improving efficiency.
  Eg: 5% GST on tractors supports small farmers, balancing productivity with equity.

Limitations in Balancing the Twin Objectives

• Revenue Stability Concerns: Lower tax rates on essentials may significantly reduce government revenues, thereby challenging overall fiscal health.
  Eg: Rate cuts on food items like noodles and chocolates may shrink immediate tax collection.
• Risk of Over-Simplification: A rigid two-rate structure may not adequately capture diverse economic realities, leaving considerable scope for anomalies.
• Exclusion of Some Sectors from Benefits: Certain service industries and emerging sectors still face higher rates, limiting inclusiveness.
• Implementation and Compliance Challenges: Effective rollout of reforms like GSTAT and provisional refunds depends on strong institutional capacity.
  Eg: Past delays in GST portal upgrades highlight risks in execution.
• Consumption vs. Investment Bias: Relief measures largely target consumption, with limited direct push for investment in high-tech or green sectors.
  Eg: Focus on consumer goods over semiconductors or EV batteries shows a partial tilt.

Conclusion

GST 2.0 marks a bold stride in tax reform, simplifying rates, correcting distortions, and easing burdens for citizens, farmers, and businesses. It balances equity and efficiency, though challenges like revenue stability, sectoral gaps, and institutional capacity persist. Continuous review and robust implementation will ensure taxation advances both growth and social justice.

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