GST 2.0-NEXT‑GEN GST

THE CONTEXT & BACKGROUND

• • In September 2025, the 56th GST Council meeting delivered a substantial overhaul—dubbed “GST 2.0″—targeted at simplifying the tax regime and strengthening consumption by reducing from four slabs (5%, 12%, 18%, 28%) to just 5% and 18%.
  • The original GST, introduced in July 2017 via the 101st Constitutional Amendment, unified India’s indirect tax system across states and centre.

THE MAIN FEATURES OF GST 2.0

• • Two-tier GST structure: Consolidated from four slabs (5%, 12%, 18%, 28%) to just 5% and 18%, effective 22 September 2025, moving 90–99% of goods into the 5% or 18% brackets.
  • 40% demerit (sin/luxury) rate: Applied to goods/services like tobacco, pan masala, sugary/caffeinated drinks, and firearms, with tax based on retail price.
  • Elimination of Compensation Cess Fund:  Introduced under the Goods & Services Tax (Compensation to States) Act 2017, from 22 September 2025, the compensation cess will be ended under the new GST regime.
  • Zero rate on individual life and health insurance premiums—removed 18% GST.
  • Massive tax reductions across essentials:
    • Utmost relief: GST Nil on UHT milk, pre-packaged paneer, Indian breads (roti, paratha), some life-saving medicines.
    • Ordinary goods: GST cut to 5% on packaged foods (noodles, sauces, chocolates), personal care items (soap, toothpaste), agricultural tools, farm machinery, cement, white goods (ACs, TVs), small cars, and more.
  • Process-related simplification: Measures include streamlined registration, refund, and return procedures, aiming to rectify classification ambiguity and inverted duty structures.

GST 2.0: THE COMPLIANCE REFORMS 

• • Single unified return:The old system of multiple forms (GSTR‑1, 3B, 9 etc.) is replaced by one single monthly return (prefilled by IT systems). This simplifies filing for all taxpayers.
  • Auto refunds & e‑filing:An automated refund mechanism (especially for small claims) and prefilled returns(GSTN database) will speed up claims. Small suppliers (<₹1,000 annual refund) will get refunds automatically.
  • Registration reforms:Traders on e-commerce platforms may use one online registration (instead of state‑wise). Non‑risky businesses get registration in 3 days; Aadhaar-based verification continues for high-risk cases.
  • Threshold & composition:The GST registration threshold is being raised (currently ₹20 lakh to be doubled) to relieve small firms, and the composition scheme is expanded to more sectors. Quarterly filings are extended to higher turnover limits.
  • Tech & integration:GSTN (the IT network) will get AI-driven analytics, tighter e‑invoicing, and interfaces with customs and income tax databases. Input Tax Credit matching will be automated to curb fake invoices.
  • Dispute resolution:The long-delayed GST Appellate Tribunal will become operational by Oct 2025. Advance ruling is uniform across states, and appeal backlogs will be time‑barred (deadline June 2026)

These process changes build on existing GST digitization. The government expects they will increase compliance and broaden the tax base. For instance, Revenue Secretary Arvind Shrivastava noted that fixing classification disputes and launching the tribunal should have “a very positive effect on revenue generation”.

THE BENEFITS

• • Consumer affordability: Reduced GST lowers prices on essentials, insurance, travel, and housing, especially ahead of festive season.
  • Inflation mitigation: Expected to lower inflation by up to 1.1 percentage point.
  • Economic boost: Estimated GDP uplift of 0.6%, positive market sentiment.
  • Stimulus for consumption and industries: Boosts demand in FMCG, appliances, automobiles, cement, tourism, insurance sectors, and white goods.
  • Simplified compliance: Easier GST structure improves ease of doing business, classification clarity, and taxpayer convenience.

THE CHALLENGES & CONCERNS

• • Revenue impact: Anticipated revenue loss—₹ 48,000 crore (~$5.5 billion) or up to $20 billion annually—raising fiscal strain, especially for states.
  • Federal challenge: Opposition-led states have asked for a multi-year compensation package, warning cumulative states revenue losses could exceed ₹2–2.5 lakh crore.
  • GST refund delays up to six months: Industry raised alarm over GST refund delays up to six months.
  • Implementation complexity: Requires precise operational guidelines; ambiguous transition periods may trigger litigation or disputes.
  • Benefits uneven: Some categories (like higher-priced apparel taxed at 18%, increased coal tax) may see mixed impact.
  • Administrative stress: Overhaul strains state budgets and GST machinery, requiring federal compensation or buffer.

STATE GOVERNMENTS’ RESPONSE

• • Surge in compensation: Some state leaders insist that remaining GST cess collections (especially on tobacco) be shared with states after loans are repaid.. Kerala and others have proposed allowing states to levy their own cesses on sin goods or guaranteeing existing GST revenue levels for 3–5 years.
  • Budget adjustments: States may tighten non‑essential spending or raise alternate taxes/fees. (GST on fuel and liquor remains outside GST; some states might hike these or local levies to raise revenue.) For example, Kerala suggested a revised Centre: State tax-sharing ratio (60:40 vs current ~58:42) to give states more .
  • Borrowing (FRBM waiver): Under the Fiscal Responsibility framework, states can borrow an extra 0.5–1.5% of GDP by implementing reforms. States may use this headroom to cover GST shortfalls. There is talk of allowing more flex even via special bonds (already done during COVID).
  • Political pressure: Several state coalitions (Tamil Nadu, Kerala, Karnataka, etc.) have formed common platforms to negotiate with the Centre. They emphasize that erosion of GST revenue undermines fiscal federalism.

THE CENTRE STRATEGIES

• • Compensation cess fund:A major cushion is the GST Compensation Fund (built from the existing cess on sin goods). By March 2026, analysts estimate a surplus of ₹40,000–50,000 crore in this fund.
  • Broader fiscal offsets:The Centre will also lean on other revenue sources. Standard Chartered forecasts that higher RBI dividends, oil tax windfalls and remaining GST cess collections could together offset a large fraction of the shortfall.
  • “Fiscally sustainable” stance:Revenue Secretary Shrivastava affirmed that a ₹48k crore loss is “fiscally sustainable for Centre and states”.

WAY FORWARD

• • Strengthen refund mechanisms: Expedite processing with export-like timelines to ease MSME cash flow.
  • Collaborative federal response: Centre–state coordination to offset revenue fallout and ensure balanced implementation.
  • Clear communication & transition support: Roll out user-friendly guidelines and support tools for businesses and common taxpayers.
  • Monitor and adjust: Observe impact on inflation, demand, revenue, and revise thresholds or slabs if needed.
  • Boost tax literacy: Especially for rural and small businesses, to navigate the simplified regime.

CONCLUSION

GST 2.0 marks India’s boldest GST reform since 2017 but Success hinges on balancing fiscal sustainability, effective implementation, and business confidence. It is expected that the next level of reform will be what Vijay Kelkar has recommended a 12% GST for both centre and state-adopting the true meaning of GST.