GST 2.0 reforms: India's next-generation tax framework

PM Narendra Modi’s address on the 79^th Independence Day served as the launch of the ‘next-generation GST reforms’. Framed as a Diwali gift to the nation, the announcement signals a strategic shift in the government’s approach to India’s indirect tax framework. The central proposal involves a radical simplification of the tax structure, moving from a multi-slab system to a streamlined two-slab framework with rates of 5% and 18%. This overhaul is expected to eliminate the existing 12% and 28% slabs.

The history of India’s indirect taxation system traces back to the Kelkar Task Force’s recommendations in 2002. The initial implementation of the Goods and Services Tax on 1 July 2017 was a monumental legislative and administrative undertaking aimed at unifying India’s fragmented indirect tax system and creating a single, integrated market.

Deconstructing the “Next-Generation” GST framework

 The proposed ‘next-generation’ GST framework is built on three three-pillar approach; rate rationalisation, structural reform, and an emphasis on the ease of living and doing business. This comprehensive blueprint aims to fundamentally transform the tax system from a complex collection mechanism into an engine for economic growth.

Pillar 1: Rate rationalisation through a two-slab system

The core of the reform is a plan to replace the existing four-tier GST structure of 5%, 12%, 18% and 28% with a simplified two-slab system. The new rates will be 5% for ‘merit’ or common-use goods and 18% for ‘standard’ goods.

The proposal calls for moving 99% of the mass-use items currently in the 12% bracket to the lower 5% category. Conversely, about "90% of taxable goods and services" from the highest 28% slab are expected to be shifted to the 18% bracket.

Pillar 2: Structural reforms for economic resilience

A key objective is the correction of the “inverted duty structure”, where the tax output is higher than the tax on the final output. This mismatch has historically led to the accumulation of input tax credit (ITC), creating working capital bottlenecks for manufacturers. By aligning input and output tax rates, the government aims to free up capital for businesses, thereby supporting domestic value addition and making "Made in India" goods more competitive.

Pillar 3: Ease of living and business

The third pillar of the reform package focuses on improving compliance and reducing the administrative burden. The Finance Ministry's proposals include a seamless, technology-driven, and time-bound registration process, which is especially beneficial for small businesses and startups. To reduce manual intervention and potential mismatches, the government plans to implement pre-filled returns. Furthermore, the reforms seek to introduce a faster, automated process for refunds, a critical measure for exporters and those affected by an inverted duty structure, as it directly impacts their cash flow.

The impetus for change: Why now?

The timing of these reforms is not coincidental. They come at a time when the GST regime has achieved significant stability, with gross collections hitting a record Rs 22.08 lakh crore in 2024-25, a 9.4% year-on-year growth according to PIB. This maturity provides the government with the confidence to undertake a fundamental overhaul.

The most critical fiscal trigger for the reforms is the planned conclusion of the compensation cess, which was created to shield states from potential revenue shortfalls during the transition to GST.

The road to Diwali

The government has set a clear and ambitious timeline for the reforms. Following the Prime Minister's Independence Day announcement, the proposal was sent for review by the GoM. The GST Council meeting is expected to take place in September, with the targeted implementation planned to occur before the festive season of Diwali.