As India marks eight years since the launch of the Goods and Services Tax (GST), the GST 2.0. was announced on the 79th Independence Day.

About Goods and Services Tax (GST)

• Goods and Services Tax (GST) was introduced in India on 1 July 2017.
• It is a destination-based, indirect tax levied on the supply of goods and services.
• GST replaced multiple indirect taxes such as excise duty, VAT, and service tax.
• It has three components: Central GST (CGST), State GST (SGST), and Integrated GST (IGST).
• The GST Council, chaired by the Union Finance Minister under Article 279A, decides tax rates and policies.

Key Structural Reforms In GST 2.0

• Simplified Tax Slabs: The multiple existing GST tax slabs (e.g., 5%, 8%, 12%, 18%, 28%) are being reduced to just two: 5% and 18%. This simplification provides clarity and predictability for businesses and consumers.
• Addressing Inverted Duty Structure (IDS): Under GST 1.0, raw materials were often taxed at higher rates than finished products, for example, an input taxed at 18% and the final product at 12%.
  • This inverted duty structure discouraged domestic manufacturing and made it difficult for businesses to claim Input Tax Credit (ITC) effectively, resulting in higher costs.
  • GST 2.0 addresses this flaw by rationalising rates, making Indian products more competitive in global markets and supporting the ‘Make in India’ initiative.
• Resolving Classification Disputes: In the earlier system, multiple tax slabs caused frequent disputes over which category a product should fall into.
  • This led to uncertainty, prolonged litigation, and increased compliance burdens.
  • GST 2.0, with fewer and clearer tax rates, significantly reduces classification ambiguities, provides predictability for investors, and fosters greater confidence in the tax system.

Benefits of GST 2.0

• For the Common Man: Lower tax rates mean a reduced burden on consumers, leading to increased disposable income, higher purchasing power, and improved affordability of goods, which in turn boosts demand. 
  • This directly enhances their ease of living.
• For Businesses (Industries, Farmers, MSMEs):
  • Boosts Domestic Manufacturing: By addressing the inverted duty structure and streamlining processes, GST 2.0 will make Indian products more internationally competitive, bolstering the ‘Make in India’ initiative.
  • Increased Investor Confidence: Clearer tax rates and reduced disputes enhance predictability, attracting global and domestic investment.
  • Reduced Tax Evasion & Higher Compliance: Simpler rates and greater clarity reduce the incentive for tax evasion, promoting full and timely tax compliance by businesses.
  • Streamlined Operations: Farmers and MSMEs will face fewer bureaucratic hurdles at initial stages, allowing them to focus on their core business.
  • Improved Administration: The reforms promise a more transparent and responsive tax system, reducing administrative burden and ensuring smoother operations, especially with technological advancements in filing returns and claiming refunds.
• Economic Stimulus and Stability:
  • Reduced Inflation: Lower tax rates on goods will lead to a reduction in product costs, thereby helping to control inflation.
    • With inflation under control, the Reserve Bank of India (RBI) may adopt a more relaxed monetary policy, potentially reducing policy rates like the repo rate.
    • Lower interest rates encourage borrowing and investment, leading to increased liquidity in the market and fostering overall economic growth.
  • Increased Tax Base and Revenue: While tax rates are reduced, the enhanced compliance and increased economic activity are expected to broaden the tax base, ultimately increasing the government’s revenue collection.
• Strengthening Atmanirbhar Bharat: These reforms are pivotal for achieving the vision of an Atmanirbhar Bharat (Self-Reliant India) by fostering a more competitive domestic manufacturing sector.

Role of GST Compensation Cess

• The cessation of the GST compensation mechanism, set to expire in March 2026, provides a crucial window for the central government to implement these tax reforms.
• When GST was introduced in 2017, states were guaranteed compensation for revenue losses for five years, extended to March 2026 due to protests. 
• Once this mechanism ends, the central government will save significant funds previously allocated for state compensation. 
• This reduction in the government’s expenditure burden allows for the reduction of tax slabs without causing severe revenue shortfalls.

Industry’s Pivotal Role in Implementation

• Constructive Engagement: Businesses must actively participate in consultations invited by the GST Council, providing timely feedback on sector-specific challenges and on operational aspects that will help refine policies and ensure workability.
• Full and Timely Compliance: Industries must embrace GST 2.0 provisions fully and on time, moving away from bypasses or tax evasion. 
  • Building trust through compliance can encourage the government to offer further benefits.
• Efficient Adoption and Best Practices: Industries should demonstrate leadership in adopting GST reforms efficiently. 
  • Sharing best practices can serve as models for others, showcasing how compliance can reduce costs and enhance competitiveness.
• Engagement in Alternative Dispute Resolution (ADR): To reduce the burden on GST authorities and expedite resolutions, businesses should engage in Alternative Dispute Resolution mechanisms for classification or other disputes.

Conclusion

GST 2.0 is a transformative reform with the potential for far-reaching positive outcomes.

• Simplifying tax rates will significantly bolster India’s domestic economy and strengthen its competitive standing in the global market.

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