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The announcement of GST 2.0 by Prime Minister Narendra Modi, focusing on rate cuts to be implemented by Diwali, is widely perceived by tax experts as a timely and strategic maneuver aimed at bolstering the Indian economy. This initiative, unveiled during his Independence Day address from the Red Fort, signifies a commitment to streamlining the Goods and Services Tax (GST) regime, which has been in effect for eight years. The core objective of these reforms is to reduce litigation and tax evasion, thereby fostering a more transparent and efficient tax system. The Finance Ministry has elaborated on the proposal, suggesting a simplification of the existing four-tiered structure of 5%, 12%, 18%, and 28% into a dual-slab system comprising a standard rate and a merit rate, in addition to special rates for specifically identified items. Luxury goods and sin goods are expected to continue attracting an additional levy, as per PTI reports. The reduction in tax rates on everyday-use goods is anticipated to have a direct impact on consumer spending and overall economic activity.
Saurabh Agarwal, Tax Partner at EY India, underscored the significance of the Prime Minister’s vision, stating that GST 2.0 represents a strategic move to build a resilient Indian economy. He emphasized that these reforms are not merely procedural adjustments but rather fundamental structural changes designed to mitigate the risks emanating from global trade tensions. By addressing the inverted duty structure, the government aims to unlock crucial working capital and enhance the competitiveness of Indian exports. The inverted duty structure, where the tax rate on inputs is higher than the tax rate on outputs, has been a long-standing concern for businesses, as it leads to an accumulation of input tax credit and increases the cost of production. Rectifying this anomaly is expected to improve cash flow and boost profitability for manufacturers. Krishan Arora, Partner – Tax Planning & Optimisation at Grant Thornton Bharat, echoed similar sentiments, noting that GST rate rationalization has been eagerly awaited. He highlighted that reducing the tax rate on items of daily consumption from 12% to 5% could lead to lower prices for consumers and stimulate consumption and demand, particularly for micro, small, and medium enterprises (MSMEs).
The potential benefits of these reforms extend beyond immediate economic stimulus. The simplification of the GST structure is expected to reduce compliance costs for businesses and make the tax system more user-friendly. A streamlined system will also be easier to administer, leading to improved tax collection efficiency and reduced opportunities for tax evasion. Since its inception, the GST has doubled the indirect tax base to 1.52 crore, indicating a significant expansion in the number of businesses brought under the tax net. However, revenue generation only recently recovered to pre-GST levels, primarily due to tax cuts and the economic slowdown caused by the COVID-19 pandemic. Vivek Jalan, Partner at Tax Connect Advisory Services LLP, anticipates that two GST Council meetings may be convened in September to further refine the rate rationalization exercise. He suggests that items of mass consumption by the common man, such as small sachets of Rs 10 or less supplied by FMCG companies, may be considered for inclusion in the lower 5% tax bracket. This would directly benefit low-income households and contribute to increased consumption.
CII Director General Chandrajit Banerjee emphasized that the Prime Minister's address demonstrated a commitment to empowering youth, strengthening MSMEs, and accelerating the Atmanirbhar Bharat mission (self-reliant India). He highlighted the Rs 1 lakh crore PM-Viksit Bharat Rozgar Yojana, a scheme that provides Rs 15,000 in support for first-time job seekers. This initiative is expected to create employment opportunities and boost the skills of the workforce. Harsh Shah, Partner at Economic Laws Practice, suggested that the reforms could include eliminating the 12% tax slab, rationalizing rates for health and life insurance, and clarifying provisions related to blocked credit. He argued that with GST collections in FY 2025-26 projected to exceed Rs 22 lakh crore, the timing is opportune to stimulate the economy, particularly in light of recent geopolitical uncertainties. These geopolitical headwinds, such as trade wars, supply chain disruptions, and inflationary pressures, pose significant challenges to the Indian economy, and the GST reforms are intended to provide a counterbalancing force.
The proposed GST reforms are multifaceted, encompassing rate rationalization, simplification of the tax structure, and measures to enhance compliance and reduce litigation. The emphasis on reducing the tax burden on essential goods and services is expected to boost consumption and improve the living standards of ordinary citizens. Furthermore, the measures aimed at streamlining the tax system will reduce compliance costs for businesses and promote ease of doing business. The success of these reforms will depend on effective implementation and close coordination between the central and state governments. The GST Council, which comprises representatives from both the central and state governments, will play a crucial role in finalizing the details of the reforms and ensuring their smooth rollout. The ongoing dialogue between the government and stakeholders, including businesses, tax experts, and consumer groups, is essential to address any concerns and ensure that the reforms are aligned with the needs of the economy. The long-term impact of these reforms will be significant, contributing to sustained economic growth, increased employment opportunities, and a more equitable distribution of wealth. The commitment of the government to continue refining the GST system demonstrates its understanding of the importance of a dynamic and responsive tax regime in a rapidly changing global environment. The focus on reducing litigation and promoting transparency will also help to build trust in the tax system and encourage greater compliance.
Moreover, the anticipation surrounding the Diwali rollout is not merely symbolic but strategically timed. Diwali, the festival of lights, is a period of heightened consumer spending in India. Implementing the GST rate cuts before or during this period is expected to amplify their impact on consumption and demand. The increased spending during the festive season will provide a much-needed boost to businesses and contribute to overall economic growth. The government's decision to prioritize items of mass consumption for rate reduction further underscores its commitment to ensuring that the benefits of the reforms reach the widest possible segment of the population. By lowering the tax burden on essential goods and services, the government aims to improve affordability and reduce the impact of inflation on low-income households. This targeted approach is expected to have a significant positive impact on the well-being of the most vulnerable sections of society. The focus on MSMEs is also crucial, as these enterprises are the backbone of the Indian economy and a major source of employment. By reducing the tax burden on MSMEs and simplifying compliance procedures, the government aims to promote their growth and competitiveness. A thriving MSME sector will contribute to increased job creation, innovation, and overall economic prosperity.
In addition to the direct impact on consumption and investment, the GST reforms are also expected to have a positive impact on the investment climate. A more transparent and efficient tax system will attract both domestic and foreign investment. Investors are often deterred by complex and opaque tax regulations, and the simplification of the GST system is expected to address this concern. Increased investment will lead to increased production, job creation, and technological advancement. Furthermore, the reforms are expected to enhance the competitiveness of Indian exports. By addressing the inverted duty structure and reducing compliance costs, the government aims to level the playing field for Indian exporters and enable them to compete more effectively in global markets. Increased exports will boost the country's foreign exchange reserves and contribute to overall economic stability. The emphasis on promoting the Atmanirbhar Bharat mission is also a key element of the government's economic strategy. By encouraging domestic production and reducing reliance on imports, the government aims to make India more self-reliant and resilient to external shocks. The GST reforms are expected to support this objective by creating a more favorable environment for domestic manufacturers.
Finally, the success of the GST reforms will depend on effective communication and public awareness campaigns. It is essential that businesses and consumers are fully informed about the changes in the tax system and their implications. The government needs to proactively disseminate information through various channels, including print, electronic media, and social media. Training programs and workshops should also be conducted to help businesses understand the new regulations and comply with them effectively. Public awareness campaigns should also be launched to educate consumers about the benefits of the GST reforms and encourage them to demand invoices from businesses. This will help to improve tax compliance and prevent tax evasion. Overall, the GST reforms represent a significant step towards creating a more modern, efficient, and equitable tax system in India. The successful implementation of these reforms will require a concerted effort from the government, businesses, and consumers. By working together, India can realize the full potential of the GST and unlock its transformative power to drive economic growth and development. The focus on reducing litigation, simplifying procedures, and promoting transparency will create a more business-friendly environment and attract greater investment. The emphasis on supporting MSMEs and promoting the Atmanirbhar Bharat mission will contribute to job creation and self-reliance. And the commitment to reducing the tax burden on essential goods and services will improve the living standards of ordinary citizens.
Source: GST reforms push: PM’s Diwali GST rate cut plan seen as timely; experts say it will boost economy