GST REFORMS 2025

Why in News?

• On 15th August 2025, the Government of India announced a major restructuring of the Goods and Services Tax (GST), termed as “GST 2.0”.

 What is GST?

• Goods and Services Tax (GST) is a destination-based indirect tax, launched on 1 July 2017, subsuming central and state taxes like excise duty, service tax, VAT, and octroi.
• Current structure: Multiple slabs (0%, 5%, 12%, 18%, 28% + cess), causing classification disputes and compliance burdens.

 The News Rate Restructuring

• Two Main Slabs: Proposal to shift to 5% and 18% as the main rates.
• 99% of items in 12% slab → 5%.
• 90% of items in 28% slab → 18%.

• Applicable to products like alcohol, tobacco, and luxury items.
• Designed to balance public health objectives and revenue needs.

• Small petrol/diesel cars: 28% → 18%.
• Insurance premiums: 18% → 5% or zero.

• Simplified registration, return filing, and refund systems to reduce litigation.
• Push for digital compliance, e-invoicing, AI-based monitoring.

• Revenue loss risk:
• SBI estimates ₹85,000 crore loss annually.
• UBS estimates ₹1.1 lakh crore loss (0.3% of GDP).
• Govt expects higher consumption (₹1.98 lakh crore boost) and widening tax base to offset revenue fall.

• States’ resistance likely, as petroleum (their major revenue source) still excluded.
• States may demand higher devolution from the Finance Commission or new compensation mechanisms.

• Simplification: Moving from 5 slabs to 2 slabs reduces confusion and litigation.
• Consumer Relief: Cheaper goods (cars, electronics, insurance) → higher disposable income.
• Boost to Demand: Timely at a period of global tariff uncertainties and weak exports.
• Business Environment: Simplified procedures and reduced tax burden enhance ease of doing business.
• Tax Morality: More goods at 5% slab → fewer ITC scams and evasion risks.

• Revenue Hit: Fiscal costs could constrain state budgets.
• Federalism Tensions: States may demand compensation, straining Centre–State ties.
• Exclusion of Petroleum: Major distortion in GST architecture remains.
• Implementation: Smooth IT transition, training for MSMEs, and dispute resolution remain key.

• GST 2.0 is a strategic gamble: short-term revenue sacrifice for long-term growth.
• If executed well, it could mark 2025 as a watershed year in India’s tax history, moving closer to the long-term vision of a single GST rate by 2047.

Q. Consider the following statements regarding the proposed GST reforms in India (2025):

1. The government has proposed reducing GST slabs to two main rates – 5% and 18%. 

  2. A new 40% slab is proposed for sin and luxury goods.

3. Petroleum products will now be included under GST and taxed at 40%.

4. Simplification of return filing and refund is a part of the reforms. Which of the above statements is/are correct? (a) 1 and 2 only

(b) 2 and 4 only
(c) 1, 2 and 4 only
(d) 1, 2, 3 and 4

  ✅ Answer: (c) 1, 2 and 4 only Explanation:

• Statement 1 – Correct:
  The government has proposed reducing the number of slabs to two main rates (5% and 18%), by moving most 12% items to 5% and most 28% items to 18%.
• Statement 2 – Correct:
  A special 40% slab is proposed for sin and luxury goods such as tobacco, and luxury items. This is separate from the two standard slabs.
• Statement 3 – Incorrect:
  Petroleum products, electricity, and alcohol (for human consumption) remain outside GST. They will not be taxed under the 40% slab.
• Statement 4 – Correct:
  Along with rate changes, the reforms also propose simplification of registration, return filing, and refunds to ease compliance and reduce litigation.