India Needs GST 2.0

Source: FL

Subject: Economy

Context: The Justice Kurian Joseph Committee on Union-State Relations released a landmark report advocating for GST 2.0.

• The report warns that the current GST framework has eroded the fiscal autonomy of States and needs a second generation of reforms to restore the federal balance and fix the broken digital tax backbone.

About India Needs GST 2.0:

What is GST?

• The Goods and Services Tax (GST) is a comprehensive, multi-stage, destination-based indirect tax that subsumed almost all central and state indirect taxes.
• It was designed to create a One Nation, One Tax system, eliminating the cascading effect (tax-on-tax) and building a seamless national market through the mechanism of Input Tax Credit (ITC).

History of GST in India:

• The Blueprint: The idea was first proposed in 2000; however, it took 16 years of political negotiation to pass the 101st Constitutional Amendment Act (2016).
• Launch: It was officially rolled out on July 1, 2017, fundamentally altering India’s fiscal federalism by granting simultaneous taxing powers to the Union and States under Article 246A.
• The Compact: States surrendered their power to tax the sale of goods in exchange for a five-year compensation guarantee (which expired in June 2022).

Recent GST Reforms in India:

• Next Generation GST Reforms (2025): Announced by the Prime Minister on August 15, 2025, to simplify the tax structure further.
• Three-Tier Rate Structure: In September 2025, the GST Council approved a transition to a simplified three-slab system: 5%, 18%, and 40%.
• Threshold Revisions: The tax-free threshold for apparel and footwear was raised to ₹2,500 (from ₹1,000) to provide relief to lower-income consumers.
• Micro-Classification Rationalization: Incoherent tax differences (like different rates for plain vs. packaged buns) were eliminated to reduce the absurdity in tax administration.
• Compensation Extension: While the revenue guarantee for states ended in 2022, the Compensation Cess was extended until March 31, 2026, primarily to service Union borrowings taken during the pandemic.

The Need for GST 2.0:

• Fiscal Cliff for States: Since the compensation guarantee expired in 2022, States like Punjab and Kerala face revenue shortfalls of 36% to 50%, yet they lack the power to adjust rates to meet local needs.
• Broken Digital Architecture: The original digital handshake (invoice matching) failed. The current reliance on self-declared GSTR-3B returns has led to massive frauds and an unsettled IGST black box.
• Union Veto in GST Council: The current voting weight (1/3rd for Union, 2/3rd for States) gives the Union a de facto veto, turning a federal negotiation forum into an appendage of the Union Executive.
• Erosion of Legislative Autonomy: Under GST, State Assemblies have lost control over 44% of their own-tax revenue, reducing elected legislatures to mere passive ratifiers of executive decisions.
• Compliance Burden on MSMEs: GST has relocated complexity from the state to the market. Small firms now spend significantly more time and money on compliance compared to large enterprises.

Way Ahead:

• Reforming Voting Weights: Reduce the Union’s vote share to 20% or move to a one member, one vote model to treat the Union as an equal partner rather than a dominant promoter.
• Rotational Chairpersonship: Rotate the GST Council Chair every year among the Union and State Finance Ministers (following the EU model) to democratize the agenda-setting process.
• Limited Rate Flexibility: Allow States to vary their SGST component within a narrow band (e.g., +/- 2%) to provide them with fiscal agency during local crises.
• Decentralizing GSTN: Transition the GST Network to a federated architecture (like UPI), allowing States to build their own front-end portals for better data access and audit.
• Independent Dispute Authority: Establish a GST Dispute Settlement Authority chaired by a retired Supreme Court judge to resolve Union-State fiscal conflicts neutrally.

Conclusion:

GST was a bold attempt at economic integration, but its current centralized execution has created an unsustainable fiscal imbalance for Indian States. GST 2.0 is not just a technical requirement but a constitutional necessity to move from coercive fiscal federalism to a genuine partnership. India’s success as a global economy depends on choosing trust over control and repairing the broken digital trust at the heart of the tax regime.