GST 2.0 Reforms: What Changes?
Why it Matters?
The new Goods and Services Tax (GST) 2.0 regime simplifies indirect taxes into a two-slab structure.
This aims to boost consumption, simplify compliance, and foster economic self-reliance.
What you should know?
New Slab Structure:
The previous multiple slabs (5%, 12%, 18%, 28%) have been largely replaced by a two-slab structure.
The new primary rates are a merit rate of 5% and a standard rate of 18%.
A special demerit rate of 40% applies to sin and luxury goods.
Special rates are retained for items like precious metals (3%) and diamonds (0.25% and 1.5%).
Key Rate Changes:
Essential items, health and life insurance for individuals are either tax-free or in the 5% slab.
GST on cement has been reduced from 28% to 18%.
Handicrafts have moved from the 12% to the 5% slab.
GST on various farm machinery and key fertilizer inputs has also been significantly reduced to 5%.
Aims of the Reform:
To increase the disposable income of households there by increasing consumption.
To resolve classification disputes and simplify compliance for businesses and MSMEs.
To strengthen local manufacturing and support the goal of an Aatmanirbhar Bharat.
Economic Impacts for the Central Government
Because tax rates on many goods have been reduced and slabs removed (12%, 28%), the Centre likely faces a loss of revenue.
more disposable income in consumers’ hands not only boosts demand, but also may help compensate for revenue loss via increased base / turnover / compliance.
Fewer slabs = easier compliance and simpler tax administration, less classification disputes.
Economic Impacts for the States:
States are projecting large revenue shortfalls: e.g. Kerala anticipates revenue loss between ₹50,000 crore to ₹2 lakh crore due to the rate rationalisation.
States with high proportion of revenue derived from GST face serious risk to finance ongoing obligations: salaries, pensions, welfare schemes.
Demands for compensation, risk of dissatisfaction among states; could affect cooperative federalism.