India’s tax landscape is about to undergo a significant change. On September 22, a new Goods and Services Tax (GST) framework, dubbed GST 2.0, will come into effect, aiming to simplify the system and boost consumer spending. This overhaul, however, also presents a new set of challenges for government finances, particularly concerning revenue collection and the fiscal deficit.
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At the core of the reform is a plan to streamline the current four-tier tax structure (5%, 12%, 18%, and 28%) into just two main slabs: 5% and 18%. A separate 40% rate will be reserved for luxury and “sin” goods. This simplification is designed to reduce compliance costs and clarify product classifications for both businesses and consumers.
A key part of this reform is the reduction of rates for 413 of the 453 items reviewed. This includes moving nearly 295 products from the 12% slab to the lower 5% or even nil bracket. Only 40 items will see a rate increase.
The government projects an initial revenue loss of about ₹48,000 crore due to these rate cuts. While this is a substantial amount, it’s expected that lower taxes on essential goods will put more disposable income in people’s hands, thereby stimulating consumption and ultimately offsetting some of the initial loss. The higher 40% tax on luxury items is also a strategic move to help make up for the revenue shortfall.
What About the Fiscal Deficit?
The fiscal deficit—the gap between the government’s spending and its revenue—is a major concern. The projected revenue loss from GST 2.0 could put pressure on this target. However, experts believe the overall impact will be limited.
The Department of Revenue anticipates that the boost in consumer spending and fewer input tax credit adjustments will help maintain a steady flow of revenue. In addition, the government is looking to other sources, like a strong dividend from the RBI, a potential increase in excise duties on OMCs, and proceeds from its divestment pipeline, to absorb the fiscal shock.
Ultimately, both the central and state governments will share the burden of this fiscal loss, with states expected to bear a larger portion.
Overall, GST 2.0 represents a significant shift in India’s tax policy. It aims to make the system simpler and more transparent for businesses and consumers alike, with the long-term goal of fostering economic growth and, in turn, increasing tax revenue.
