Paper: GS – III, Subject: Economy, Topic: Taxation, Issue: GST 2.0 for cooperative federalism.
Context:
56th GST Council meeting announced the launch of GST 2.0. The upcoming reforms should enable greater revenue share for states (60:40 split) to strengthen cooperative federalism.
Key Highlights:
Key GST Reforms:
- Tax Slab Rationalisation:
- Earlier: 4 slabs (5%, 12%, 18%, 28%).
- New system: 2 slabs retained (5% and 18%).
- 12% & 28% categories collapsed and moved to 5% or 18%.
- New penal slab for luxury & sin goods (tobacco, etc.).
- Impact on Revenue:
- 18% slab now collects majority of GST.
- Govt estimate of revenue loss: ₹1.5 trillion (gross) amounting to the net loss of ₹48,000 crore (FY 2023–24 base).
- Loss offset: Higher consumption spending and increased tax mop-up may offset losses.
- Expected Multiplier Effect:
- Fiscal multiplier of GST rate cut = 1.1.
- Reduction in tax burden leads to higher demand which results in more spending and higher tax revenue.
Issues in GST Regime:
Rationale for 60:40 Split in Favour of States:
- Larger fiscal burden borne by states especially in sectors such as health, education, and welfare.
- Strengthens cooperative federalism.
- Addresses mismatch between responsibility and revenue autonomy.
- Reduces state-level fiscal anxiety & dependence on central transfers.
Broader Implications:
| Positive | Challenges |
| Improves fiscal autonomy of states.Builds trust in federal relations.Encourages spending-led growth at state level | Centre may resist due to its own fiscal needs.Need for safeguards against states’ fiscal mismanagement. |
Way Forward:
- Implement 60:40 GST revenue sharing in phased manner.
- Ensure compliance simplification for businesses.
- Broaden GST base by including fuels, and electricity.
- Strengthen cooperative federalism by aligning fiscal capacity with responsibilities.
Conclusion:
GST 2.0 reforms mark a historic shift. A 60:40 split in favour of states is justified by their fiscal burden. Such reform will strengthen India’s federal structure and ensure fiscal stability with growth.
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