GST 2.0: Nine Years Later, A Tax Reckoning Arrives

GST 2.0 has been generally welcomed. However, according to some reports, several State Finance Ministers at the GST Council meeting demanded a clear assurance from the Centre that their revenue losses would be compensated. Clearly, they were unable to extract any firm commitment, the reason being that, despite the expected spur in demand, the revised GST rates are estimated to have revenue implications of around ₹48,000 crore. In the following article, K. G. Sharma examines this issue and also discusses some other questions that have arisen from this decision.

GST 2.0: Nine Years Later, A Tax Reckoning Arrives

K. G. Sharma

When Prime Minister Narendra Modi stood atop the Red Fort this Independence Day and announced sweeping changes to India’s Goods and Services Tax (GST), the optics were unmistakable. It was not just a policy update—it was a political moment, a rhetorical pivot, and perhaps, a quiet admission. After nine years of what many have called economic cruelty, the government now promises relief. But the timing, the tone, and the substance of GST 2.0 raise some pertinent questions. 

The original GST rollout in 2017 was marketed as a “One Nation, One Tax” revolution. In practice, it became a labyrinth of slabs, surcharges, and compliance nightmares. Small businesses floundered under the weight of digital filings and reverse charge mechanisms. Consumers bore the brunt of high taxes on essentials—children’s toys, school supplies, food items, and even basic insurance. The tax on sanitary napkins, for instance, sparked outrage and was only removed after sustained public pressure. For years, the government defended these choices as necessary for fiscal discipline. Now, with GST 2.0, many of those very items are being exempted or moved to lower slabs. If this is reform, then what was the last nine years?

The new structure simplifies the tax regime into two primary slabs—5% for essentials and 18% for most other goods. Luxury and sin goods remain in the 40% bracket. Life and health insurance are now exempt, and rates on cement, small cars, and household items have been slashed. These changes are undeniably welcome. But they also feel like a tacit acknowledgment that the earlier system was flawed, even punitive. As one opposition MP quipped, “If you now say toys and food shouldn’t be taxed, were you looting children and the poor all these years?”

The GST Council, a constitutional body comprising representatives from the Centre and states, is supposed to be the final authority on such decisions. Yet, the Prime Minister’s announcement came before the Council’s formal meeting. This raises uncomfortable questions about federalism and process. If the Council is supreme, why was its verdict proclaimed from the Red Fort? And if the PM can override or pre-empt the Council, is it truly a deliberative body or just a rubber stamp for the ruling party, which holds a majority within it?

Beyond the politics, there’s an economic undercurrent that cannot be ignored. India’s exporters are feeling the heat from global headwinds. The Trump-era tariffs, many of which remain in place, have squeezed Indian goods out of key markets. With global demand weakening and domestic consumption sluggish, the government needed a stimulus. GST rate cuts are a quick fix to boost spending, but they also reveal deeper cracks. The middle class has seen its purchasing power eroded. MSMEs are struggling to stay afloat. The informal sector, once the backbone of India’s economy, has been battered by demonetisation, lockdowns, and tax burdens. GST 2.0 is not just a tax reform—it’s a desperate attempt to revive a faltering economy.

Critics argue that the timing of the reform—just ahead of Diwali and state elections—is no coincidence. It’s a classic populist move: offer relief, win votes. But such relief comes at a cost. Lower tax rates mean lower government revenues. Will states, already grappling with fiscal deficits, be compensated adequately? Or will they be forced to cut spending on health, education, and infrastructure? The Centre’s track record on GST compensation has been patchy at best. Several states have complained of delayed payments and opaque calculations. Without a robust compensation mechanism, GST 2.0 could deepen the Centre-state divide.

There’s also the question of environmental priorities. The reduction in GST on petrol and diesel vehicles—now taxed at 18% instead of 28%—has inadvertently widened the price gap between internal combustion engine (ICE) vehicles and electric vehicles (EVs). EVs, which already struggle with high upfront costs, lose their competitive edge just when India needs to accelerate its clean energy transition. This isn’t just a policy oversight—it’s a strategic contradiction. On one hand, the government promotes sustainability; on the other, it subsidises fossil-fueled mobility. As climate activist Sunita Narain once said, “India cannot afford to grow dirty and clean up later.”

GST 2.0 may simplify the tax structure, but it also simplifies the narrative. It’s not just about slabs and exemptions—it’s about accountability. If the government now admits that taxing essentials was wrong, then who bears responsibility for the years of hardship? If the GST Council is truly autonomous, why was its authority bypassed? And if the reforms are driven by economic distress, shouldn’t that be part of the public conversation?

In the end, GST 2.0 is a mirror. It reflects the pressures of governance, the weight of public opinion, and the realities of a slowing economy. It offers relief, yes—but it also demands reflection. Reform is welcome. Reckoning is overdue.

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The author is a freelance journalist and retired officer from the Indian Information Service.

Views are personal.