Editorial: GST 2.0, a tool for growth stimulation

If executed well, GST 2.0 could evolve from a foundational reform into a competitive advantage, supporting India’s journey toward becoming a developed nation by 2047

Overcoming the initial scepticism, technical glitches, and political differences, the Goods and Services Tax (GST) regime has come a long way and proved largely beneficial for the country. Eight years after its rollout, the GST system has successfully doubled the indirect tax base to 1.52 crore businesses and has laid the foundation for a more integrated national market. However, the complexity of the current structure presents big challenges. The second-generation reforms involving simplification of the tax structure, announced by Prime Minister Narendra Modi during his Independence Day address, will position the GST as a tool for growth stimulation. The proposed simplified regime will now have just two main tax slabs of 5 per cent and 18 per cent, apart from a special 40 per cent rate for luxury and sin goods. Currently, there are four main rate slabs: 5%, 12%, 18%, and 28%. As part of the rejig, about 99 per cent of items currently taxed at 12 per cent are likely to be moved to the 5 per cent bracket. Similarly, around 90 per cent of taxable goods in the existing 28 per cent slab are expected to shift to the proposed 18 per cent category. Undoubtedly, the GST has been the most transformative indirect tax reform undertaken in independent India. By subsuming a cascade of 17 Central and State taxes and 23 cesses, the GST has helped reduce the overall tax burden on goods and services, saving households around 4 per cent on monthly expenses. It warranted a complete reset of one of the world’s largest economic systems. The system has reasonably stabilised now.

The overall experience has been positive as the tax compliance has gone up significantly, and several businesses have come under the net of the formal economy. The success of GST is a fitting tribute to the spirit of cooperative federalism, despite political and ideological differences. There has always been a strong case for simplification of the tax structure. While the 18 per cent tax rate is the largest revenue generator, accounting for 65 per cent of total collections, the 12 per cent bracket contributes only about 5 per cent to the total GST revenue. This disproportionate revenue yield for a full tax slab creates administrative complexity without a commensurate fiscal benefit. The proposed GST reform strategy rests on three pillars that aim to strengthen India’s economic resilience: Structural reform for economic resilience, rate rationalisation through a two-slab system, and ease of living and business. In recent years, the government’s focus has been on spurring consumption by putting more money in people’s pockets so that they spend more. The GST 2.0, which is in tune with this policy, comes days after Parliament passed the Income Tax Bill aimed at simplifying and consolidating income tax laws, especially for salaried taxpayers. The overarching intention is to lessen the financial burden on the middle class. If implemented successfully, the proposed reforms will transform GST from a foundational change into a competitive advantage, supporting India’s journey toward becoming a developed nation by 2047.

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