UPSC DAW Mains Answer Writing 2025 26th August

UPSC DAW Mains Answer Writing 2025 26th August

Question

The promise of GST as a simple, unified indirect tax remains only partially realised. In this context, analyse the implications of GST 2.0 rate rationalisation. (15 marks, 250 words)

Model Answer

Introduction:

Goods and Services Tax (GST), launched in July 2017 under the 101st Constitutional Amendment Act, aimed to unify India’s indirect tax system as a simple, destination-based levy. However, multiple slabs and exemptions diluted this vision. The Prime Minister’s 2025 announcement of GST 2.0, with reports of two slabs (5% and 18%) and a higher rate (40%) for sin/luxury goods, marks progress, but raises concerns overrevenue mobilisation, inverted duty structures, and fiscal federalism.

GST 2.0 and Revenue Mobilisation:

Revenue Dependence:

GST constitutes ~25% of Union government’s gross tax revenue (2025-26 BE, Union Budget).

For states, GST accounts for about 44% their own tax revenues (15th Finance Commission).

Narrowing Tax Base Risk:

Shifting many goods from 12% to 5% could shrink the revenue base.

Currently, 18% slab contributes ~60% of GST revenues (32nd GST Council meeting).

International Comparisons:

Canada (single GST/HST) and Australia (10% uniform GST) demonstrate how simplicity aids compliance and stable revenue.

India’s multi-slab approach creates scope for classification disputes, reducing buoyancy.

Inverted Duty Structures and GST 2.0:

Problem:

Inverted duty arises when final output taxed < inputs, e.g., textiles

Leads to blocked Input Tax Credit (ITC), refund delays, and liquidity crunch for SMEs.

Impact:

Sectoral stress on sectors like textiles, footwear, fertilisers and renewable energy.

Frequent GST Council interventions (E.g., footwear & textiles duty correction-2021) show systemic nature.

GST 2.0 Opportunity:

Rationalisation can align inputs and outputs closer to standard rate (18%), reducing litigation and refund backlogs.

CAG Report highlighted accumulation of ITC refunds and administrative inefficiencies.

Fiscal Autonomy of States:

End of Compensation:

5-year GST compensation period ended in June 2022 (as per GST (Compensation to States) Act, 2017).

States now bear full brunt of revenue shortfall from rationalisation.

Concerns:

If 12% goods move to 5%, States lose buoyant sources of revenue.

Larger states with manufacturing bases (Maharashtra, Tamil Nadu, Gujarat) and consumption-heavy states (UP, Bihar) face uneven effects.

Inter-state GST settlement delays add to fiscal stress.

Way Forward:

Move towards a Single Standard Rate: Minimise use of reduced rates/exemptions; target transfers can achieve redistribution better (as seen in OECD economies).

Address Inverted Duty Structure: Correct misalignments systematically, not ad hoc, to reduce refund delays.

Protect States’ Fiscal Space: Consider a calibrated transition with partial GST Compensation 2.0 for 3–5 years, focused on vulnerable states.

Broaden Tax Base: Rationalise exemptions (E.g., electricity, petroleum, alcohol) to improve buoyancy.

NITI Aayog’s Strategy for New India @75 recommended bringing petroleum and electricity under GST to reduce cascading.

Conclusion:

GST 2.0 is a necessary step towards realising the vision of ‘One Nation, One Tax,’ but rationalisation must balance simplicity, revenue sufficiency, and federal fairness. As the 15th Finance Commission underlined, GST reform is not just a tax design issue but a test of India’s cooperative federalism.