Introduction to GST 2.0

Eight years after its initiation, India’s Goods and Services Tax (GST) system is undergoing a significant transformation, referred to as GST 2.0. This reform focuses on long-term structural changes rather than immediate revenue generation. The primary aim is to reduce the complexity in India’s tax system, which has been a persistent issue since independence.

Key Features of GST 2.0

Rate Rationalization

• The existing four-slab structure (5%, 12%, 18%, 28%) will be simplified into two main slabs: 5% and 18%.
• Special rates of 0.25% and 3% will continue, with a new 40% rate for select luxury and sin goods.
• Out of 506 goods, 90% have seen rate reductions, with only 52 items experiencing an increase.
• 52 items have been granted complete tax exemptions to make essential goods more affordable.

Impact on Revenue

There is an expected short-term dip in GST collections, with a projected reduction from Rs 20.2 lakh crore to Rs 19.7 lakh crore. The effective rate is estimated to decrease marginally from 11.64% to 11.43%.

Economic Logic and Laffer Curve

• The reforms follow the economic principle of the “Laffer curve,” which suggests lower rates can lead to higher collections through increased compliance and economic activity.
• The success of these reforms depends on businesses passing tax changes to consumers and the elasticity of consumer demand to price changes.

Addressing the Tax Gap

GST 2.0 aims to reduce India’s persistent tax gap, estimated to keep the country’s tax effort at around 70%. By reducing compliance burdens, the reform seeks to encourage voluntary participation in the formal economy.

Institutional Reforms

Goods and Services Tax Appellate Tribunal (GSTAT)

• The operationalization of GSTAT will provide businesses with a forum for appeals, ending procedural uncertainty.

Support for Exporters and Small Businesses

• The removal of threshold limits on low-value export consignments will benefit small exporters.
• Indian intermediaries can now claim export benefits, enhancing trade competitiveness.
• A voluntary simplified registration scheme for low-risk businesses with a monthly tax liability under Rs 2.5 lakh reduces the compliance burden on smaller enterprises.

Strategic Benefits

• Higher tax rates on goods consumed by younger demographics aim to harness India’s demographic dividend.
• Sin taxes on tobacco and aerated drinks address public health objectives while leveraging products with inelastic demand.

Implementation Challenges

Successful implementation requires meticulous coordination across the value chain. Past experiences in other countries like Malaysia show that even minor glitches can cause major disruptions. Critical factors include:

• Robust training for tax officials.
• Clear communication to businesses.
• Quick resolution of technical issues.

Conclusion

GST 2.0 is aligned with Prime Minister Narendra Modi’s vision of a simplified tax framework focusing on long-term revenue growth. The success of GST 2.0 hinges on increased voluntary compliance, drawing on international experiences where simplified tax systems initially led to revenue drops but later resulted in sustained growth.