Paper: GS – III, Subject: Economy, Topic: Taxation, Issue: Significance of GST 2.0.
Context:
GST was introduced in India with the aim of promoting consumption and production efficiency via a destination-based tax system. However, it continued to face issues like multiple tax rates, inverted duty structure, compensation cess, and compliance costs. A new rate structure effective from September 22, 2025 marks significant rationalisation.
Key Highlights:
Key Features of GST 2.0:
- Simplification of Rate Structure:
- 12% and 28% slabs removed.
- Current rates: 0%, 5%, 18%.
- 40% demerit rate on sin/luxury goods.
- Some items moved from 12% to 18% category.
- Sectoral Impact:
- Beneficiary Sectors:
- Textiles, consumer electronics, automobiles, food items → job-intensive industries.
- Fertilisers, agricultural machinery, renewable energy → lower input costs benefit farmers.
- Beneficiary Sectors:
- Coverage:
- 546 goods revised.
- 200+ items saw rate reductions.
Revenue Implications:
- Revenue Determinants:
- GST revenue (R) = tax rate (t) × tax base (B).
- Price changes impact demand (q), influencing revenue.
- Expected Outcome:
- Lower rates → fall in post-tax prices → higher demand.
- But net revenue loss expected.
- Estimates:
- Ministry of Finance: ₹48,000 crore annual loss.
- Other independent estimates: higher.
Economic Effects:
| Short-term Effects | Long-term Effects |
| Revenue Fall: inevitable due to lower rates.Price Reductions: expected in more than 200 items.Post-tax price fall smaller than tax cut percentage due to demand elasticity.GDP growth may slow due to fiscal strain.Risk of higher fiscal deficit.Estimated net revenue loss: ₹48,000 crore (FY 2025–26). | Higher Consumption: demand boost from lower prices.Income Augmentation: disposable income rises, spurring further consumption.Growth Stimulus: employment-intensive sectors gain having overall productivity boost.Nominal GDP growth projected: 10–11%.Long-term supply chain efficiencies and compliance simplification. |
Income-augmenting Effects:
- Government bears revenue loss initially, but benefit accrues to taxpayers and consumers.
- Disposable income gains could be significant → supports consumption-driven growth.
- Benefits flow to:
- Middle class (consumer durables, autos, food items)
- Farmers (lower input costs)
- Employment sectors (textiles, electronics, FMCG).
Challenges:
- Revenue Loss: substantial fiscal gap to be managed.
- Classification Issues: determining tax slab by nature of goods vs. demand weakness.
- ITC Bottlenecks: difficulties in claiming input tax credit could persist.
- Uncertainty: growth effects may take time, while fiscal strain is immediate.
Conclusion:
GST 2.0 represents a major tax reform with short-term fiscal pain due to revenue loss, but potential long-term benefits in terms of growth, demand, employment, and competitiveness. Success will depend on effective classification of goods, ITC efficiency, and government’s ability to manage fiscal trade-offs.
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