Context:
- India’s taxation system has long been criticized for being complex, opaque, and inefficient, with poor compliance.
- While direct taxes witnessed major reforms, indirect taxes remained fragmented until the Goods and Services Tax (GST) was introduced in 2017, subsuming multiple taxes and cesses.
- The latest reforms - dubbed as GST 2.0 - represent the most significant recalibration since GST’s inception, aiming at simplification, consensus-building, and fiscal federalism.
Historical Evolution of GST in India:
- Early attempts:
- 1985: VP Singh first conceived the idea of GST.
- 1986: MODVAT (Modified Value Added Tax) was introduced in 1986, but the reform remained unfinished.
- 1991 Balance of Payments (BoP) crisis: Structural adjustment programs by World Bank and IMF pushed for a VAT-based system. Yet the reforms were partial, and progress remained slow.
- Reform push:
- 2002 Kelkar Task Force: Recommended GST during Vajpayee government.
- Consensus-building challenges: State autonomy, revenue loss, and political hesitation stalled reforms.
- Breakthrough:
- 2014 onwards: The decisive moment came, when the then Finance Minister Arun Jaitley assured the States of compensation of 14% annual growth in GST revenues for five years, addressing fears of revenue loss.
- GST Council created: The creation of the unique federal body - GST Council - under the Union finance minister, with all state finance ministers as members, was unprecedented.
- 2017: When GST was launched in July 2017, it subsumed 17 taxes and 13 cesses into a single system.
Achievements of GST (2017–2025):
- Taxpayer base: The taxpayer base expanded from 66 lakh in 2017 to over 1.5 crore today.
- Tax collections: Collections rose sharply, with the tax base itself increasing from Rs 45 lakh crore to Rs 173 lakh crore over the past decade at a CAGR of 14.4%.
- Compliance: Improved via Council-led revisions and rationalisation.
- Federal cooperation: GST Council as a symbol of pooled sovereignty.
GST 2.0 - The 2025 Reforms:
- Consensus achieved: Approved unanimously at the 56th GST Council meeting, chaired by Bihar Deputy CM Samrat Choudhary.
- Key features:
- Four slabs now compressed to two: 5% and 18%, with a higher rate of 40% for luxury and sin goods.
- Exemptions: Life and health insurances (and their premiums) will now attract nil GST
- Significance:
- Simplification: Easier classification, fewer disputes, smoother administration.
- Consumer impact: Essentials cheaper, reduced burden.
- Business impact: Greater predictability, improved compliance.
- Policy impact: Shift from incremental tinkering to bold consolidation.
Why is Reform Transformative?
- Unprecedented consensus: All states agreed, strengthening fiscal federalism.
- Revenue stability: The Revenue Secretary estimated a short-term hit of about Rs 48,000 crore based on 2023-24 consumption, but buoyancy from higher compliance and growth will offset losses.
- Virtuous cycle potential: Predictability and cooperation may extend to reforms in land, labour, and capital markets.
Challenges and Unfinished Agenda:
- Ensuring that benefits reach the common consumer, small and medium enterprises, and industry more broadly.
- Allocating GST proceeds to urban local bodies for sustainable urbanisation.
- Extending the federal spirit of the GST Council to other reforms.
- Guarding against political resistance and revenue volatility.
Conclusion:
- The GST 2.0 reform of 2025 demonstrates India’s ability to combine political consensus with bold policy design, reinforcing its global image as a reform-oriented economy.
- By simplifying the tax structure, enhancing compliance, and strengthening cooperative federalism, it marks a decisive step in India’s journey of economic reforms.
- If the GST Council model of pooled sovereignty is replicated in land, labour, and capital reforms, India can unlock the next phase of inclusive and sustainable growth.
- Ultimately, the real winners are the people of India, who benefit from a simpler, more transparent, and growth-friendly taxation system.
