Introduction: A New Chapter in India’s Tax Reform Journey

India’s Goods and Services Tax (GST) was introduced on July 1, 2017, as a historic reform to simplify the complex indirect tax system. For decades, businesses and consumers struggled with a web of state-level VAT, central excise, service tax, octroi, and other levies. GST promised “One Nation, One Tax”, bringing transparency, efficiency, and a unified tax structure.

Over the past six years, GST has undergone continuous fine-tuning. From the reduction of tax rates on essential items to addressing compliance challenges faced by small businesses, the system has evolved significantly. Now, with the proposed GST 2.0, India is preparing for one of the biggest rationalizations since its inception.

The Group of Ministers (GoM) and the GST Council, chaired by Finance Minister Nirmala Sitharaman, have recommended eliminating the 12% and 28% slabs and moving towards a three-rate structure of 5%, 18%, and 40%. According to the SBI Research Report, this change will impact consumers, businesses, and government revenue alike.

Let’s explore the details, implications, and potential outcomes of GST 2.0.

Evolution of GST in India: From 2017 to 2023

To understand why GST 2.0 is so significant, it’s essential to look at the journey so far.

Before GST: A Complicated Tax Maze

• Multiple Taxes: Excise duty, service tax, VAT, entry tax, octroi, luxury tax, etc.
• Cascading Effect: Tax-on-tax burden increased costs for consumers.
• Lack of Uniformity: Different states levied varying VAT rates, creating compliance hurdles.
• Inefficient Logistics: State border check posts led to delays and higher costs.

GST Introduction in 2017

• Replaced 17 central and state taxes.
• Introduced four primary slabs: 5%, 12%, 18%, and 28%.
• Brought a unified national market, benefiting trade and logistics.

Key Rationalizations Post-2017

• 2018: 178 items moved from 28% slab to lower categories.
• 2019: Weighted average GST rate dropped from 14.4% (2017) to 11.6%.
• 2020–2022: Compliance systems like e-invoicing, GSTN improvements, and faceless audits made GST more robust.

Now, with GST 2.0, India is preparing for an even simpler tax design—fewer slabs, clearer classifications, and stronger consumption-driven growth.

GST 2.0: What the Proposal Means

The GST Council has not yet given final approval, but the GoM’s recommendation has set the stage for sweeping reforms.

Proposed Structure Under GST 2.0

1. 5% Slab (Merit Goods)
   • Essential commodities, daily-use products, and goods that directly impact lower- and middle-income households.
   • Covers nearly 90% of consumer items.
2. 18% Slab (Standard Rate)
   • Most manufactured goods, electronics, and services.
   • Acts as the “default” GST rate.
3. 40% Slab (Sin and Luxury Goods)
   • Tobacco, pan masala, aerated drinks, luxury cars, and possibly online gaming.
   • Designed to discourage harmful consumption while safeguarding revenue.

This three-tiered system ensures simplicity while addressing social and economic priorities.

SBI Research Report: Balancing Revenue and Consumption

The SBI Research Report has provided crucial insights into the financial impact of GST 2.0.

Key Findings

• Revenue Loss: Government may face ₹85,000 crore annual loss due to reduced rates.
• Short-Term Hit: Around ₹45,000 crore revenue shortfall expected in FY2023-24 (if implemented mid-year).
• Consumption Boost: Lower prices will increase demand, adding ₹2 lakh crore worth of consumption.
• Net Effect: Revenue loss will be offset by higher tax collections from increased sales.
• GDP Impact: Projected 6% increase in GDP growth from higher spending.

Weighted Average GST Rate Projection

• 2017: 14.4%
• 2019: 11.6%
• Post-GST 2.0: Expected to fall below 10% (around 9.5%)

This reduction aligns with global best practices, where indirect tax rates are streamlined to encourage consumption.

Sector-Wise Impact of GST 2.0

1. FMCG (Fast-Moving Consumer Goods)

• Major beneficiary as most items move to 5% slab.
• Prices of soaps, detergents, packaged food, and beverages to reduce.
• Demand surge expected, boosting companies like HUL, Nestlé, ITC, and Dabur.

2. Automobiles

• Affordable vehicles may become cheaper under 18%.
• Luxury cars to face 40% GST, keeping them out of mass affordability.
• Automobile industry, struggling post-pandemic, may see partial revival.

3. Online Gaming and Gambling

• Likely to be taxed at 40%.
• Government aims to regulate betting and real-money gaming, discouraging excessive participation.
• Industry growth may slow, but regulation ensures long-term sustainability.

4. Jewellery and Precious Metals

• Currently taxed at 3% (gold) and 1.5% (diamonds).
• GST Council yet to decide if rates will change.
• Sector awaits clarity, especially with rising demand for investment-grade gold.

5. Beverages and Aerated Drinks

• Could be moved to 40% GST.
• Aimed at discouraging sugar-heavy consumption.
• Global trend: Similar high taxes on sodas in the US, UK, and Europe.

6. Real Estate and Housing

• Affordable housing may benefit if moved to 5% GST.
• Luxury real estate could face higher taxation, impacting premium buyers.

7. Healthcare and Pharmaceuticals

• Essential medicines to remain in 5% slab, ensuring affordability.
• Healthcare equipment may see rationalized rates, improving accessibility.

8. Technology and E-commerce

• Electronics may stabilize at 18%.
• Online retail platforms to benefit from increased demand across categories.

Global Comparisons: Learning from Other Economies

GST or VAT systems worldwide follow fewer slabs:

• Singapore: Single GST rate of 9%.
• UK: Three main VAT categories – 0%, 5%, 20%.
• Australia: Flat 10% GST on most goods and services.
• India (Current): 5%, 12%, 18%, 28%.
• India (Proposed): 5%, 18%, 40%.

India’s move towards simplification is in line with global standards, though the 40% sin tax remains unique to balance public health and revenue concerns.

Challenges Ahead for GST 2.0

Despite optimism, several hurdles exist:

1. Revenue Sharing with States – States may resist if compensation is not assured.
2. Product Classification Disputes – Grey areas (like beverages or gaming) may spark litigation.
3. Implementation Timeline – Businesses need transition time for invoicing and compliance changes.
4. Inflation Risks – While SBI projects stable inflation, sudden demand surges could test the market.

Market Sentiment and Public Opinion

• Stock Markets: FMCG, auto, and consumer durables stocks rallied on the news.
• Businesses: Most industries welcomed the simplification, calling it a “pro-consumption” move.
• Consumers: Positive response, especially from middle-class families hoping for cheaper essentials.

FAQs on GST 2.0

Q1. What is GST 2.0?
A simplified tax system with only three slabs: 5%, 18%, and 40%.

Q2. Which goods will be cheaper?
Most consumer goods, FMCG products, and daily essentials will become cheaper as they shift to the 5% slab.

Q3. What will happen to luxury and harmful products?
They will be taxed at 40% to discourage excessive consumption and maintain revenue balance.

Q4. How much will the government lose in revenue?
Around ₹85,000 crore annually, but higher consumption will offset this loss.

Q5. Will GST 2.0 increase inflation?
No. SBI’s analysis suggests inflation will remain stable due to reduced tax burdens.

Conclusion: GST 2.0 – A Reform for the Future

GST 2.0 represents a transformational shift in India’s indirect tax framework. By moving towards fewer slabs, India is not only simplifying compliance but also aligning with global taxation standards.

• Consumers will enjoy cheaper goods.
• Businesses will benefit from higher demand.
• Government will gain from long-term economic growth, even if short-term revenues dip.

With consumption contributing nearly 60% to India’s GDP, this reform could accelerate growth and help achieve the nation’s $5 trillion economy target.

The coming months will be crucial as the GST Council finalizes the structure. But one thing is clear: GST 2.0 is set to redefine India’s economic future.