Since its launch in 2017, India’s Goods and Services Tax (GST) has transformed indirect taxation. Yet, multiple slabs (0%, 5%, 12%, 18%, 28%), combined with frequent changes, led to classification disputes, compliance fatigue, and uneven revenue dependence.
To address these pain points, the Centre has circulated a blueprint for GST 2.0, which proposes:
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Merger of 12% and 28% slabs,
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Two principal slabs: 5% and 18%, and
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A punitive 40% slab for sin goods (tobacco, aerated drinks, luxury indulgence).
This isn’t just a rate restructuring. It’s a structural reset designed to balance simplification, consumer affordability, business efficiency, and government revenues.
Why GST 2.0? — The Causes Driving the Reform
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Too Many Slabs, Too Many Disputes
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Businesses have faced endless litigation on whether an item falls under 12% or 18% (e.g., namkeens vs snacks, juices vs aerated drinks).
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Multiple slabs confused SMEs and burdened compliance systems.
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Revenue Skewness
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The 18% slab alone contributes 65% of GST revenues.
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12% and 28% slabs contribute 11% and 18%, but create maximum disputes.
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Consumer Pressure & Inflation
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Middle-class items like TVs, ACs, cement taxed at 28% inflated costs.
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Households demanded relief amid rising inflation and housing needs.
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Ease of Doing Business
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Simplification helps attract investment, reduces working capital blockages, and ensures SMEs aren’t trapped in classification battles.
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Global Comparisons
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Most mature GST/VAT regimes (EU, ASEAN) operate on 1–2 principal rates, making India’s 5-slab system an outlier.
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GST 1.0 vs GST 2.0 — Before and After
| Current GST (2017–2025) | Proposed GST 2.0 | Cause → Effect |
|---|---|---|
| Nil / 0.25% / 1% / 3% special rates | Continue | Cause: Industry lobbying (diamonds, jewellery). → Effect: Sector stability, export support. |
| 5% | 5% | Cause: Essentials must remain affordable. → Effect: Relief for food, medicines, education, healthcare. |
| 12% | Merged into 5% or 18% | Cause: Ambiguity, disputes, and mid-level inflation. → Effect: Some items cheaper (5%), some costlier (18%), but cleaner structure overall. |
| 18% | 18% (mainstream rate) | Cause: Already majority contributor. → Effect: Becomes “default slab” for most goods and services. |
| 28% | Merged into 18% | Cause: High consumer resentment, dampening demand. → Effect: Relief in housing (cement), automobiles, consumer durables. |
| Compensation cess | To be rationalized/merged into 40% sin levy | Cause: Revenue shortfall financing for states. → Effect: Cleaner, targeted cess regime. |
| 28% + cess for sin goods | 40% flat sin slab | Cause: Public health + revenue gap. → Effect: Higher tax deterrence + fiscal compensation. |
Stakeholder Impact: Cause and Effect Matrix
| Stakeholder | Cause | Effect |
|---|---|---|
| Consumers | 28% on durables, 12% on semi-essentials inflated costs. | Relief: Durables (ACs, TVs, cement) become cheaper at 18%. Burden: Some 12% items shift to 18%. Lifestyle change: Sin goods deterred with 40%. |
| Businesses/Industry | Complex slabs → disputes, litigation, compliance fatigue. | Simplification reduces disputes. FMCG demand improves (snacks, juices, foods at 5%). Construction demand revives (cement cheaper). Transition cost: ERP/SKU reclassification. |
| Government & States | Dependence on 28% slab revenues (~18%). | Short-term stress as 28% revenue drops. Sin tax (40%) and higher compliance expected to offset. Long-term: Broader base, better predictability. |
Deep-Dive Analysis
Consumers
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Monthly household savings: Notebooks, bicycles, namkeens cheaper at 5%.
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Durables affordability: ACs/TVs shifting 28% → 18% means a ₹5 lakh car may get ₹50,000 cheaper.
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Housing benefit: Cement at 18% reduces home construction cost by 5–7%, benefiting buyers.
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Health signal: 40% levy on tobacco/aerated drinks balances fiscal needs with public health goals.
Businesses & Industry
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FMCG: Juices, snacks shifting to 5% = higher consumption volumes.
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Consumer Durables: Demand revival as price-sensitive middle-class buyers return.
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Construction & Real Estate: Lower cement cost = boost in infrastructure + affordable housing.
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SMEs & Startups: Reduced compliance burden; focus shifts from litigation to growth.
Government & Fiscal Health
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Short-term challenge: States lose high-yield 28% inflows.
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Offset mechanism:
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Compliance gains from fewer disputes.
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Demand elasticity—lower tax = higher consumption volumes.
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40% sin levy bridges fiscal gaps.
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Long-term vision: Predictable, transparent GST structure improves trust, attracts investment, and strengthens federal fiscal health.
Expert Lens
A senior official noted:
“The aim is to move 99% of mass-use items into the 5% to 18% bracket. Tax incidence will fall, but compliance and predictability will rise.”
This reflects a deliberate cause-and-effect policy design:
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Cause: High complexity, consumer pain, uneven revenues.
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Effect: Simpler GST, pro-growth demand, compliance-led buoyancy.
Challenges to Watch
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Federal Politics: Will states accept lower 28% inflows?
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Inflation Balance: Which 12% goods move to 18% could spark middle-class pushback.
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Implementation: ERP/system reconfiguration, re-coding of SKUs, consumer price resets.
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Rate Stability: The success of GST 2.0 depends on long-term commitment, not frequent tinkering.
Conclusion
GST 2.0 is a cause-and-effect reform:
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Cause: Complexity, disputes, consumer cost pressures, revenue skewness.
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Effect: Two-slab clarity (5% + 18%), affordability for essentials and durables, targeted 40% deterrent for sin goods, and higher compliance-led buoyancy for government.
If cleared, this will mark India’s most transformative tax rationalization since 2017—a GST that is simpler, fairer, and better aligned with both growth and governance.
