Next-Generation GST Reform (2025)

Why in News?

Prime Minister Narendra Modi urged states to cooperate in implementing Next-Generation GST Reforms before Diwali 2025. The proposal seeks to simplify GST into two slabs (5% and 18%) plus a 40% sin goods rate, benefiting the poor, middle class, and businesses.

Description:

• Introduced: 1st July 2017.
• Based on Vijay Kelkar Task Force (2002) recommendations.
• Replaced multiple indirect taxes (excise, VAT, service tax) → “One Nation, One Tax” system.
• Current Structure (pre-2025 reforms): 5%, 12%, 18%, 28% + special rates (0.25% for diamonds, 3% for gold/jewellery).
• Challenges:
  • Multi-slab complexity.
  • Inverted duty structures (input tax > output tax).
  • Compliance burden for MSMEs.

Next Gen GST: Blueprint 2025:

Announced by PM from Red Fort (15th Aug 2025) on GST’s 8th anniversary.

• New GST Rates: 5% & 18%.
• Launch Timeline: Before Diwali 2025.
• Original GST launch: 1st July 2017.
• Pillars of Reform: Structural, Rate Rationalisation, Ease of Business.
• Article: GST Council – Art. 279A.
• Compensation Cess ends: March 2026.

Pillars of Reform:

1. Structural Reform – Fixes inverted duty structure, smooth ITC flow, boosts Atmanirbhar Bharat.
2. Rate Rationalisation – Four slabs reduced to two (5% & 18%); essentials → 5%, durables → 18%.
3. Ease of Living & Business – Tech-enabled compliance (pre-filled returns, automated refunds), simpler registration for MSMEs/startups.

Inclusive Growth Dimensions:

• Common Man: Cheaper essentials (food, household goods).
• Women: Reduced tax on personal care items.
• Students: Lower tax on educational tech & materials.
• Farmers: Lower rates on agri-inputs/equipment.
• Middle Class: Cheaper consumer durables.

GST Council & Federal Aspect:

• GST Council = Constitutional body (Art. 279A).
• Composition: Union Finance Minister + State Finance Ministers.
• Decision-making: 75% weighted vote (Centre = 1/3, States = 2/3).
• Reflects Cooperative Federalism.
• Reforms under review by the Group of Ministers (GoM) before final approval.

Economic Impact Expected:

• Consumption boost (Laffer Curve effect).
• MSMEs → lower costs + formalisation.
• Exports & Manufacturing → more competitive.
• Consumer Relief → higher purchasing power.
• Space for reforms created after the end of GST Compensation Cess (March 2026).

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