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Q. “The proposed GST 2.0 seeks to address the structural inefficiencies of India’s indirect tax framework. Critically examine its rationale and challenges for transforming India’s indirect tax regime. (250 words)
08 Oct, 2025 GS Paper 3 EconomyApproach :
- Provide a brief introduction to the GST2.0 reforms.
- Discuss the rationale behind the recent GST reforms in India.
- Highlight the challanges that emerged in the course of GST reforms.
- Conclude with a suitable way forward.
Introduction:
The Goods and Services Tax (GST) introduced through the 101st Constitutional Amendment Act 2017 is a comprehensive indirect tax on goods and services in India. Over time, GST faced challenges such as multiple rates, inverted duty structures, and high compliance costs.
- GST 2.0 simplifies the system by adopting a two-tier structure with 5 percent for essential items, 18 percent for standard goods, and a 40 percent demerit rate for luxury and sin goods, making the tax regime more efficient, transparent, and growth-oriented.
Body :
Rationale Behind the Recent GST Reforms in India:
- Lower Prices, Higher Demand: Reduced GST rates make goods and services cheaper, increasing household savings and stimulating consumption, especially in essential and employment-intensive sectors.
- The reforms are expected to stimulate domestic demand, encourage formalization of the economy, and contribute to long-term fiscal stability
- Support for MSMEs: Lower input costs on items like cement, auto parts, and handicrafts make micro, small, and medium enterprises more competitive and promote entrepreneurship.
- Ease of Compliance: The simplified two-rate structure reduces tax disputes, accelerates decision-making, and lowers compliance costs for businesses.
- Evidence from past reforms suggests that lower rates combined with better compliance can increase GST collections in the medium term.
- Wider Tax Base : Simpler rates encourage voluntary compliance, broadening the tax net and potentially improving government revenues over time.
- Support for Manufacturing: Correcting inverted duty structures enhances domestic value addition, strengthens export competitiveness, and boosts the Make in India initiative.
- Social Protection: Exemptions on insurance and essential medicines strengthen household security and improve access to healthcare, addressing equity concerns.
- Consumption and Production Efficiency: By eliminating cascading taxes and rationalizing rates, GST 2.0 promotes resource allocation efficiency across sectors.
Issues have Emerged in the Course of GST Reforms
- Fiscal Revenue Shortfall: The reforms entail significant revenue loss, with estimates around ₹48,000 crore annually, primarily due to reduced rates and zero-rating of many goods.
- This creates fiscal pressure on both the central and state governments, forcing them to either cut expenditures or increase borrowing.
- Input Tax Credit (ITC) and Cascading Tax Issues: Exemptions and zero-rated supplies restrict eligibility for ITC, leading to cascading taxes on inputs.
- Rate Structure and Classification Ambiguities: Simplification to fewer slabs helps but classification disputes persist over which goods fall under given categories.
- Special rates and the new 40% slab for sin goods increase complexity in areas such as luxury and harmful goods taxation.
- Compliance Complexity and Technological Integration: Although slabs are rationalized, businesses face transitional compliance burdens, including recalibrating pricing, billing systems, and ERP updates.
- MSMEs may lack the capacity to swiftly adapt, facing higher compliance costs and learning curves.
- The GST Network (GSTN) and government leverage technologies like AI and data analytics to improve compliance and detect evasion, but frequent rule changes still complicate adherence.
- Enforcement and Dispute Resolution Delays: The GST Appellate Tribunal (GSTAT), essential for resolving disputes quickly, remains non-functional or delayed in several states.
Measures to Strengthen GST 2.0 Reforms
- Strengthen GST Administration: Enhance the GST Network (GSTN) and use AI/data analytics to improve compliance monitoring and reduce evasion.
- Support MSMEs: Provide capacity building, simplified compliance, and technological assistance to help small businesses adapt to new slabs.
- Monitor Fiscal Impact: Use targeted fiscal measures or liquidity management to offset revenue shortfall without compromising social and infrastructure spending.
- Seamless Input Tax Credit (ITC) Mechanism: Ensuring a frictionless ITC chain prevents working capital blockages for businesses.
- Linking ITC eligibility with real-time invoice matching can reduce fraud while maintaining liquidity.
- Promote Awareness and Training: Conduct taxpayer education campaigns for businesses and consumers on new rates and compliance procedures.
- Expand digital invoicing, e-way bills, and automation to reduce administrative burden.
Conclusion:
The Next-Generation GST reforms represent a bold step towards building a simpler, fairer, and future-ready tax architecture. By reducing the tax burden on citizens and empowering farmers, MSMEs, women, youth, and middle-class families, GST 2.0 lays the foundation for inclusive prosperity, fiscal resilience, and global competitiveness.
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