GST 2.0: A Simplified & Consumer-Centric Tax Reform | UPSC Current Affairs Analysis

By Suryavanshi IAS

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Why in News?

Prime Minister Narendra Modi, in his Independence Day 2025 speech, announced a major overhaul of the Goods and Services Tax (GST), shifting to a two-tier tax structure (5% and 18%). This reform aims to benefit the poor, middle class, farmers, and MSMEs while simplifying India’s indirect tax system.

This blog covers:
✔ Key Features of GST 2.0
✔ Expected Impact on Different Sectors
✔ Political & Economic Implications
✔ UPSC-Relevant Insights

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Key Features of the New GST Regime

1. Two-Tax Slab Structure (5% & 18%)

• Current GST Slabs (4-tier): 5%, 12%, 18%, 28%

• Proposed GST Slabs (2-tier):

  • 5%: Essential goods (food items, medicines, etc.)

  • 18%: Standard rate for most goods & services

  • 40%: "Sin goods" (luxury items, tobacco, aerated drinks)

2. Rationalisation of 28% Slab

• Most items in the 28% category (like cement, automobiles) will shift to 18%.

• Only ultra-luxury/sin goods (e.g., tobacco, high-end cars) will attract 40%.

3. Focus on Consumer Welfare

• Lower taxes on daily essentials benefiting the poor & middle class.

• MSMEs & small traders to benefit from simplified compliance.

• Farmers to gain from reduced input costs (fertilizers, equipment).

4. Fiscal Sustainability

• The government expects higher compliance & economic buoyancy to offset revenue losses.

• Compensation Cess (introduced to repay states for GST shortfall) may end before March 2026.

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Expected Impact

1. Benefits for Common Citizens

• Cheaper essential goods (5% GST on food, healthcare).

• Lower prices on mid-range products (18% instead of 28%).

• Easier tax compliance for small businesses.

2. Boost to MSMEs & Startups

• Reduced tax burden on raw materials.

• Simplified filing processes to encourage formalization.

3. Challenges

• Short-term revenue loss for the Centre & States.

• Opposition-ruled states may resist changes, fearing fiscal strain.

• Sin goods taxation (tobacco, luxury cars) needs careful handling.

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Political & Economic Implications

1. Centre-State Relations

• GST Council’s role is crucial in finalizing rates.

• Opposition states (like Kerala, Punjab) may demand revenue guarantees.

2. Global Context

• Reforms come amid US tariff threats & global economic uncertainty.

• Aims to make India a more business-friendly economy.

3. Long-Term Vision

• "One Nation, One Tax" gets closer to reality with simplified slabs.

• Increased compliance could widen the tax base.

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UPSC-Relevant Questions

Mains (GS-3: Indian Economy)

1. "The proposed GST 2.0 reforms aim to balance consumer welfare with fiscal sustainability." Discuss.

2. How does GST rationalisation impact cooperative federalism in India?

3. Critically examine the role of the GST Council in India’s fiscal architecture.

Prelims Practice

Q. The new GST regime proposed in 2025 focuses on:
(a) Increasing tax slabs to 6 tiers
(b) Reducing slabs to 5% and 18%
(c) Abolishing GST for all MSMEs
(d) Removing sin goods taxation
Ans: (b)

Q. The GST compensation cess was extended beyond 2022 due to:
(a) COVID-19 revenue losses
(b) Demonetisation impact
(c) State government protests
(d) Global recession
Ans: (a)

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Conclusion

The GST 2.0 reforms mark a significant shift towards a simpler, pro-consumer tax system. While challenges like revenue stability and state cooperation remain, the move aligns with India’s long-term economic goals.

For UPSC Aspirants:

• Focus on GST Council’s functioning.

• Link reforms to fiscal federalism & ease of doing business.

• Track global comparisons (e.g., VAT in the EU vs. GST in India).

Stay tuned for more in-depth analyses! 🚀

— Team Suryavanshi IAS