GST 2.0: The Two-Slab Reform and Its Fiscal Arithmetic
What Changed
- The 12 and 28 per cent slabs were abolished; most items moved to 5 or 18 per cent.
- A special 40 per cent rate applies to tobacco, pan masala, aerated and caffeinated drinks, and luxury cars; the compensation cess was phased out.
- Individual life and health insurance premiums became exempt; several medicines and medical devices moved to nil or 5 per cent.
- Cement fell from 28 to 18 per cent; small cars and two-wheelers under 350cc from 28 to 18 per cent.
The Rationale
Multiple rates had created classification disputes (the 'popcorn' and 'paratha' controversies), inverted duty structures and compliance costs. Simplification aims to lift consumption, cut litigation and widen the base, offsetting an estimated near-term revenue loss of about ₹48,000 crore through higher compliance and demand.
- Inverted duty structure: inputs taxed higher than outputs, blocking refunds and hurting manufacturers — a key target of the reform.
- Revenue neutral rate (RNR) was estimated at 15-15.5 per cent by the Arvind Subramanian committee (2015); the effective rate had drifted to about 11 per cent.
- States' concern: compensation ended in June 2022; the reform's revenue impact falls on both tiers under the 50:50 CGST-SGST split.
Assessment
GST 2.0 moves India closer to the 'one nation, one tax' ideal, but the 40 per cent demerit rate and exemptions still leave three effective rates. The fiscal test is whether consumption growth compensates for lower rates; the federal test is whether States accept revenue risk without a renewed compensation mechanism. Bringing petroleum and electricity into GST remains the unfinished agenda.
Test Yourself
2 graded questions · Prelims format
With reference to the Goods and Services Tax in India, consider the following statements:
- 1.The GST Council was constituted under Article 279A of the Constitution.
- 2.In the GST Council, the vote of the Central Government has a weightage of one-half of the total votes cast.
- 3.Alcohol for human consumption is outside the ambit of GST.
Frequently Asked Questions
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