GST 2.0: A Landmark in India’s Tax Journey

GST 2.0: A Reset or a Revenue Gamble?

The introduction of GST 2.0, spearheaded by the 56th GST Council, signals not merely a recalibration of India’s tax structure but a broader fiscal gamble that risks undermining states’ financial autonomy. While rationalized slabs and rate reductions promise simplicity and consumption-led growth, the reforms fail to adequately address systemic pitfalls in federal fiscal management, sustainability, and compliance mechanisms.

The Institutional Landscape: Revisiting GST’s Foundations

Since its rollout in 2017, GST has been hailed as one of India’s most transformative tax reforms, promising a unified market, simplicity, and economic buoyancy. Yet, recurrent issues like complex rate structures, input tax credit (ITC) restrictions, and bureaucratic inefficiencies have marred its implementation. GST 2.0 seeks to streamline these by collapsing tax slabs into four categories: nil, merit (5%), standard (18%), and demerit (40%). Additionally, exemptions for essentials, a revamped GST network (GSTN), and operationalization of the Goods and Services Tax Appellate Tribunal (GSTAT) aim to address inefficiencies. However, the expiration of GST compensation in March 2026 exposes deeper tensions between centralized control and state autonomy — a persistent Achilles' heel of India’s fiscal federalism.

Concrete Changes, Concrete Risks

Among its features, GST 2.0 prioritizes affordability with significant rate reductions:

• Households: Milk, chapati, and toothpaste now exempt or taxed at 5%, promising relief from inflationary pressures.
• Healthcare: Life and health insurance premiums, cancer drugs, and medical devices enjoy exemptions or cuts, addressing affordability but potentially creating revenue gaps.
• Farmers: Fertilizers and machinery taxed at 5%, with hopes of reducing cultivation costs.
• Infrastructure: Lower cement GST rates (from 28% to 18%) aim to spur affordable housing and construction growth.

Yet, the financial strain looms large. Official estimates peg revenue loss for FY 2025–26 at ₹96,000 crore, of which states must absorb a disproportionate ₹67,700 crore. Some deficit states may resort to regressive measures like cutting public expenditure or raising additional cess. Early data from FY 2025–26 suggests SGST collections grew only 5.8% in April-August against a budget projection of 22%. The broader gambit of consumption-boosting rests on fragile assumptions of sustained demand and robust compliance.

Additionally, the GSTN infrastructure faces significant pressure. The envisioned AI-led compliance and real-time e-invoicing demand a technological overhaul — one that risks uneven implementation across states grappling with digital divides.

Centralized GST: Weakening Federal Balance

Despite promising rate simplifications, GST 2.0 reinforces the structural imbalance between the Centre and states. Article 279A mandates GST Council’s consensus for rate changes, which effectively centralizes decision-making. The expiration of the compensation cess by 2026 leaves states vulnerable to fiscal shocks, particularly those reliant on higher-rate items like alcohol and luxury goods outside GST’s ambit. States like Kerala have voiced concerns about the erosion of autonomy, criticizing the lack of flexibility to meet localized needs.

The counter-narrative — that GST ensures harmonization and collective fiscal stability — weakens against empirical scrutiny. NSSO consumption data (2023) shows rural households spend disproportionately on essentials now exempted, which adds little incremental benefit. Furthermore, low-compliance states like Bihar face risks of exacerbating fiscal strain, contrary to the Centre’s optimistic projections of uniform growth.

International Comparison: Germany’s Cooperative Federalism

India’s GST centralization sharply contrasts with Germany’s federated tax system. German states levy VAT independently, within EU parameters, allowing individualized fiscal planning while contributing to national cohesion. This cooperative federalism balances local priorities with overarching economic objectives — a missing structural principle in GST 2.0. For India, such flexibility could mitigate state revenue uncertainties post-cess and foster localized growth strategies.

Where GST 2.0 Succeeds — and Fails

GST 2.0 fares well in addressing sector-specific anomalies. The textile sector, plagued by inverted duty structures, benefits from lower rates on man-made fibers, promising supply chain efficiencies. The green economy gains momentum through lower duties on renewable components. Yet, service sectors remain neglected, with ambiguities around digital economy taxation widening compliance burdens.

Crucially, reforms fail to incorporate petroleum, electricity, and real estate into the GST framework — domains representing sizable portions of the Indian economy. Without their inclusion, aspirations of a truly unified tax base remain hollow.

Assessing the Structural Limitations

The structural flaws in GST 2.0 arise from its contradictory objectives: simplifying tax rates while maintaining fiscal buoyancy. A streamlined system increases compliance feasibility but risks revenue volatility. Reliance on technological upgrades may disproportionately burden MSMEs and informal sectors, already strained by frequent reforms. While GSTAT promises judicial consistency, the uncertainty surrounding evolving definitions aggravates litigation concerns.

What India needs is not merely harmonization but institutional recalibration — decentralizing certain fiscal levers to states, aligning ITC mechanisms to real-time data, and addressing GST exemptions prone to misclassification. These reforms must transcend political expediency and embed sustainable fiscal principles.

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