Mentor’s Comment

The 56th meeting of the Goods and Services Tax (GST) Council has ushered in a decisive set of reforms, marking a new chapter in India’s fiscal federalism. By moving towards a simplified two-rate structure and addressing long-standing distortions, GST 2.0 promises to reshape consumption patterns, boost competitiveness, and build a fairer system. For UPSC aspirants, this development offers lessons on economic governance, cooperative federalism, social security, and inclusive growth.

Introduction

The 56th GST Council meeting (September 3, 2025) has been hailed as a watershed in India’s taxation history. For the first time since the rollout of GST in 2017, the complex multi-slab structure has been significantly rationalised. The new structure introduces just two core slabs, 18% (Standard Rate) and 5% (Merit Rate), with a 40% demerit rate for a few goods, while several essentials are exempt. These reforms are not limited to technical tax changes; they are a “people’s reform” with direct impact on households, farmers, industries, and the healthcare sector.

The significance of GST 2.0 reforms

1. Historic simplification: Earlier GST had 5%, 12%, 18%, and 28% slabs. The new 2-rate system with exemptions marks the biggest simplification since 2017.
2. People-centric relief: Daily-use goods like soap, shampoo, bicycles, and kitchenware now taxed at 5%; essentials like milk, paneer, parathas exempt. This makes taxation citizen-friendly.
3. Social security boost: All life and health insurance products are exempted from GST for the first time, improving affordability and raising insurance penetration.
4. Correcting distortions: Long-pending inverted duty structures, particularly in textiles and fertilizers, have been corrected.
5. Institutional strengthening: The announcement of GST Appellate Tribunal (GSTAT) by year-end promises faster dispute resolution.

Impact of reforms on households and social security

1. Cheaper essentials: Items like soap, shampoo, toothpaste, bicycles, and kitchenware moved to the 5% slab.
2. Exemptions on food: UHT milk, paneer, chapatis, and parathas exempt, easing burden on middle and low-income families.
3. Insurance relief: GST exemption on life and health insurance makes coverage accessible to senior citizens and low-income groups.
4. Healthcare affordability: Cancer drugs, medicines for rare diseases, and critical devices made cheaper through exemptions and cuts.

Benefits of GST 2.0 for farmers and rural India

1. Lower cultivation cost: Fertilisers, sulphuric acid, and ammonia shifted from 18% to 5%.
2. Cheaper farm equipment: Tractors and machinery brought to 5% slab, improving productivity and rural income.
3. Structural correction: By rationalising inputs and outputs, GST 2.0 reduces price distortions and supports agricultural sustainability.

Implications for industries and employment

1. Labour-intensive sectors: Handicrafts, marble, granite, and leather goods get rate reductions, boosting employment.
2. Textile competitiveness: GST on man-made fibres and yarn reduced to 5%, resolving a major inverted duty issue. This is expected to improve exports and domestic value-addition.
3. Infrastructure multiplier: Cement rate cut from 28% to 18% to spur housing and infrastructure.
4. Green economy boost: Cuts on renewable energy devices and auto components support sustainable growth.

Institutional reforms under GST 2.0

1. Operationalisation of GSTAT: To be functional by year-end, ensuring quicker dispute resolution and taxpayer confidence.
2. Process reforms: Provisional refunds for inverted duty structures, risk-based compliance, and harmonised valuation rules reduce business uncertainty.
3. Ease of doing business: These reforms align India’s tax system with global best practices and make compliance less cumbersome.

Phased rollout and implementation strategy

1. Gradual rollout: Effective from September 22, 2025, reforms are phased to balance fiscal stability and consumer benefits.
2. Revenue neutrality: Phasing prevents sudden fiscal shocks while stimulating demand and investment.
3. Stakeholder partnership: Council’s decisions reflect responsiveness to industry, consumers, and state governments.

Conclusion

GST 2.0 represents not just a fiscal reform but a societal shift. By rationalising slabs, correcting distortions, and easing compliance, it strengthens the foundation for a Viksit Bharat 2047. The reforms are inclusive, covering farmers, workers, households, and industries alike, while building institutions like GSTAT. The success of these reforms will ultimately depend on smooth implementation and sustained cooperative federalism.

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