Mint Explainer: Will fewer slabs in GST 2.0 finally fix India's tax maze?

Mint

a day ago

While delivering his Independence Day address on 15 August, Prime Minister Narendra Modi announced the long-overdue goods and service tax (GST) reforms. He promised a "double Diwali' this year, indicating that a reformed GST system with lower rates for consumers would be in place before the festival of lights.
Mint looks at the proposal, its implications and whether GST 2.0 will correct all the shortcomings of the earlier version.
Why is GST India's biggest indirect tax reform?
The idea of GST was first proposed in the year 2000 by the Kelkar Task Force on Indirect taxes. It took 17 long years for it to become a reality and was rolled out on 1 July 2017. By subsuming a wide variety of taxes such as excise duty, value-added tax and service tax, it created a uniform tax rate across the country. The simplified taxation system eliminated the cascading effect of taxes, reduced compliance and logistics costs, while improving the ease of doing business. GST collections have risen sharply in the last eight years. In July 2025, it was ₹1.96 trillion as against ₹0.92 trillion mopped up in July 2017.
What were its shortcomings?
There were many. To address the concerns of all the states and to bring them on board, after all, they were giving up their right to levy taxes, many compromises were made. This resulted in multiple tax rates.
There were four major tax slabs (5%, 12%, 18% and 28%), two carve-out rates (0.25% for diamonds and 3% for precious metals like gold and silver) and a compensation cess. Also, multiple rates created inverted duty structure and the indirect tax was an implementation nightmare. The simplicity that GST promised was lost in the process.
What is a compensation cess?
While negotiating GST, many states were worried about losing revenue. To give them the confidence and get them to agree, the Centre committed to make good any loss in revenue on account of GST and to fund this, it levied a compensation cess on select items. If the GST collections fell short, the states were paid out of the funds collected through the cess.
The commitment to compensate the states ended after five years on 30 June 2022 but was extended to repay loans that the Centre had borrowed during covid to compensate the states for revenue shortfall. Compensation Cess will come to an end by March 2026.
What has the government proposed now?
The government has said that there will be just two major GST rates. It will eliminate the 12% and 28% slabs. Most of the items in the 12% and 28% slab will move to 5% and 18% respectively. A 40% slab will be introduced for sin goods such as tobacco, and pan masala and luxury cars.
Compensation cess will be phased out, and a health cess may be imposed for sin goods. The carve-out rates of 0.25% and 3% will continue.
Will these measures simplify GST?
Experts are divided. Purists among indirect tax experts say anything more than a single slab makes GST complex and less efficient. They suggest a 12% or 13% rate, which is slightly higher than the revenue- neutral rate.
Three slabs (5%, 18% and 40%) plus two carve-out rates won't bring about much change. They also argue that a large chunk of the consumption basket, such as electricity, petroleum products, alcohol and stamp duty, is outside the GST. For an efficient taxation system, most of them should be brought within GST. They want the government to place the proposal in the public domain for discussion before undertaking the reforms.
What do officials say?
Government officials and other experts argue that the proposed reform is a 'gigantic' move. The government had originally talked about removing just the 18% slab. They say that most developed nations have two major slabs (merit and standard) with carveout rates for diamonds and precious metals. In India's case, the 40% slab will be another carveout rate. With lesser slabs, the inverted duty structure—the bane of GST 1.0—will be eliminated.
Lower rates, they add, will trigger a consumption boom. Increased consumption will trigger private investment and accelerate economic growth at a time when Indian exports are facing headwinds from steep US tariffs. They expect only a temporary fiscal impact as higher consumption will compensate for lower rates.