India’s Landmark GST Overhaul: From a Complex Multi-Slab System to a Cleaner Two-Rate Structure

In a move set to redefine India’s indirect taxation, the Central government has unveiled a blueprint for what is being hailed as the most ambitious reform to the Goods & Services Tax (GST) since its launch in 2017. This proposed transformation, already sent to the Group of Ministers (GoM) for evaluation, seeks to replace the current multi-slab maze with a simpler two-rate system, alongside a distinct higher levy for luxury and demerit goods. If approved, the changes could be implemented by Diwali, aligning with the festive season’s economic momentum.

India's central government has proposed the new GST rates to be at 5% and 18%, as per the media reports | LiveMint

The Core of the Reform: Two Principal Slabs

The hallmark of the proposed GST 2.0 is simplification. Instead of the current five key rates — 0%, 5%, 12%, 18%, and 28% — most goods and services would be taxed at either 5% or 18%. A separate higher slab, estimated at around 40%, would apply exclusively to luxury and sin goods such as tobacco products and certain high-end commodities.

This restructuring is not merely cosmetic; it aims to substantially ease compliance and price distortions. A large share of goods currently taxed at 12% is expected to migrate to the 5% category, reducing costs for everyday essentials. Likewise, many products now under the 28% slab would shift to 18%, benefiting consumers and industries alike.

Government’s Vision: Three Pillars of GST 2.0

The Finance Ministry has positioned this reform around three strategic pillars. The first is structural reform, which addresses the long-standing inverted duty structure, where inputs are taxed higher than final products, leading to credit accumulation and litigation. This also includes rationalising complex classifications that often become contentious between taxpayers and authorities.

The second pillar is rate rationalisation, aimed at converging the existing scattered slabs into just two widely applicable rates — often described as “merit” and “standard” — while keeping a special category only for a narrow range of items.

The third pillar focuses on ease of living. The plan includes technological interventions such as pre-filled GST returns, faster refunds, and automated reconciliation, significantly reducing compliance burdens, especially for small businesses and exporters.

The Timing: Why Now Is the Right Moment

Two major developments have created the right environment for this overhaul. First, GST revenues are at record highs, with gross collections in FY 2024–25 crossing ₹22.08 lakh crore, signalling robust compliance and a deeper formalisation of the economy. This gives the Centre the fiscal confidence to adjust slabs without threatening revenue stability.

Second, the end of the GST compensation cess regime opens fiscal space to rationalise rates without upsetting the delicate Centre-state revenue balance. With compliance systems now more mature and digital monitoring in place, the government sees this as an opportunity to address complexity without compromising fiscal discipline.

Impact on Consumers and Businesses

For the average consumer, the most immediate benefit will be lower prices on everyday goods, particularly those shifting from the 12% bracket to 5%. This could have a mild disinflationary effect, especially in the household goods and packaged food categories.

For businesses, particularly micro, small, and medium enterprises (MSMEs), fewer slabs will mean less ambiguity and fewer classification disputes. Input tax credit mismatches — a chronic issue for exporters and manufacturers — are expected to reduce, and faster refund processes will help ease working capital pressures.

Luxury and demerit goods will remain heavily taxed, preserving the principle of equity in taxation while ensuring that essential goods remain affordable.

The Road to Rollout

The path forward involves careful consensus-building. The GoM will review the detailed proposal before submitting it to the GST Council for final approval. The Council, which includes both central and state finance ministers, will then decide on the final rate structure and the exact classification of goods into each slab.

Given that GST is a shared revenue source, achieving alignment between the Centre and the states will be critical. The government has indicated a preference for launching the new structure by Diwali, allowing businesses time to update pricing systems and IT infrastructure before the festive demand surge.

Key Challenges and Open Questions

The success of GST 2.0 will depend on several unresolved factors. The first is how extensively goods will be redistributed between the two primary slabs. The second is the precise definition of luxury and sin goods subject to the higher rate, which could influence revenue neutrality and consumption patterns.

Additionally, while rate rationalisation simplifies the tax structure, it must be coupled with operational reforms like pre-filled returns and automated reconciliations to deliver the full benefit to taxpayers. Without these, businesses may still face procedural hurdles despite the cleaner slab design.

Conclusion: A Turning Point for GST

If executed as planned, this overhaul will mark a decisive step toward making GST simpler, fairer, and more predictable. By trimming the number of slabs, reducing classification disputes, and introducing technology-driven compliance measures, the Centre hopes to enhance both efficiency and equity in the tax system.

For consumers, the reform promises cheaper essentials and less confusion over pricing. For businesses, it offers a smoother compliance landscape and fewer administrative headaches. For the economy, it could be a catalyst for growth by improving ease of doing business while maintaining fiscal prudence.

The challenge now lies in balancing political consensus, revenue considerations, and administrative readiness. If those align, GST 2.0 could well become the defining tax reform of the decade.

(Sources: News18, Business Today, LiveMint)