Implementation of GST 2.0: UPSC Current Affairs Story Arc

Overview

The 'GST 2.0' reform represents a second-generation overhaul of India’s indirect tax regime, moving from a multi-tier system (5, 12, 18, 28%) to a simplified two-slab structure of 5% and 18%. Spearheaded by the Central Government and finalized with state cooperation, the transition aims to make the tax system more consumer-centric by reducing costs for essentials like food and medicine to 0% or 5%. Key players include the Prime Minister, who framed it as a 'Bachat Utsav' (Festival of Savings), and the GST Council, which negotiated the draft reforms. For India, this matters because it addresses long-standing structural inefficiencies like the Inverted Duty Structure (IDS) while attempting to spur consumption among the 'Neo-Middle Class'.

How This Story Evolved

GST overhaul proposed → Opposition demands official discussion paper → PM urges state cooperation for rollout → Government frames regime as consumer-centric → GST 2.0 officially implemented at midnight → Economic rationale for the new structure explained post-launch

1. 2025-08-16: Major GST Shake-up Proposed
   More details

   UPSC Angle: Proposed GST overhaul: reducing slabs, retaining 5% and 18%.

   Key Facts:

   • To be implemented by Diwali 2025
   • Includes two main GST rates (5% and 18%)
   • A special 40% rate for select sin and luxury goods
   • Aims to simplify tax compliance, reduce rates on essentials, and address inverted duty structures
   • GST
   • 5%
   • 18%
   • 1%
   • 40%
   • 12%
   • 28%
   • 99%
   • 90%
2. 2025-08-16: Congress Demands Discussion on GST 2.0
   More details

   UPSC Angle: Congress demands discussion on GST 2.0.

   Key Facts:

   • GST 2.0
3. 2025-08-17: PM Modi Urges States to Implement GST Reforms Before Diwali
   More details

   UPSC Angle: PM urges states to implement GST reforms before Diwali.

   Key Facts:

   • Narendra Modi
   • GST reforms
   • Diwali
   • PM Narendra Modi urged States to cooperate in implementing proposed GST reforms.
   • The Centre has circulated the draft of the next-generation GST reforms among States.
4. 2025-08-18: New GST Regime to be Consumer-Centric
   More details

   UPSC Angle: New GST regime to be consumer-centric.

   Key Facts:

   • The new GST regime will be consumer-centric.
   • It will focus on the poor, MSMEs, the middle class, and farmers.
5. 2025-09-22: GST 2.0 Implementation
   More details

   UPSC Angle: Not exam-relevant

   Key Facts:

   • New GST structure retains only 5% and 18% slabs.
   • Taxes on essentials like food, medicines, and insurance reduced to 0% or 5%.
   • Expected to save INR 2.5 lakh crore annually.
   • PM Modi spotlighted the Neo-Middle Class—a dynamic group of 25 crore Indians who have recently risen out of poverty.
   • GST rates on about 375 items were slashed, making goods cheaper.
   • A compensation cess is levied only on tobacco and related products.
   • Revised GST rates and exemptions effective from September 22, 2025.
   • Simplified GST structure with two main slabs: 5% and 18%.
   • 40% GST rate on luxury and sin goods.
   • GST exemptions on life and health insurance premiums.
6. 2025-09-23: Economic Rationale of GST 2.0
   More details

   UPSC Angle: GST 2.0 aims to boost household consumption through lower GST rates.

   Key Facts:

   • Lower GST rates to boost household consumption
   • Correcting Inverted Duty Structure (IDS)
   • IDS: Input tax rate > output tax rate

Genesis

Trigger

The Centre formally proposed the GST overhaul on August 16, 2025, suggesting the elimination of the 12% and 28% brackets to simplify compliance.

Why Now

The move was timed to coincide with the pre-Diwali season of 2025 to boost festive demand and capitalize on a window of political consensus for next-generation reforms.

Historical Context

This connects to the original 101st Constitutional Amendment of 2016 which launched GST, but also addresses the 'complicated' nature of the initial four-rate structure (5/12/18/28) that experts argued led to classification disputes and tax leakage.

Key Turning Points

1. [2025-08-16] Official proposal to eliminate 12% and 28% brackets.

   It shifted the GST debate from 'incremental changes' to a 'complete overhaul'.

   Before: A complex four-rate system with various cesses. After: A two-tier structure with no additional cesses.

2. [2025-09-22] Midnight implementation of GST 2.0.

   Actualization of the 'Bachat Utsav', immediately altering the price of 375+ items for consumers.

   Before: High tax on medicines and insurance (12-18%). After: Essentials reduced to 0% or 5%.

Key Actors and Institutions

Key Institutions

• GST Council
• Ministry of Finance
• MSME Sector
• Congress Party (Opposition)

Key Concepts

Inverted Duty Structure (IDS)

A situation where the tax rate on inputs (raw materials) is higher than the tax rate on the finished output, leading to an accumulation of Input Tax Credit (ITC) and capital blockage for manufacturers.

Current Fact: GST 2.0 specifically aims to correct IDS to unlock capital for MSMEs, as highlighted in the economic rationale provided on September 23, 2025.

Two-Slab Regime

A simplified indirect tax structure that consolidates multiple rates into two primary categories to reduce litigation and improve compliance.

Current Fact: The new structure retains only the 5% and 18% slabs, moving 99% of items from the 12% slab to the 5% category.

Sin Tax

A higher tax rate imposed on goods deemed harmful to society or individuals, such as tobacco or luxury items, often used to discourage consumption while generating high revenue.

Current Fact: GST 2.0 introduces a higher 'sin rate' of 40% on a limited number of items, replacing the previous 28% + Cess model.

What Happens Next

Current Status

GST 2.0 was officially implemented at midnight on September 22, 2025, with rates on over 375 items effectively slashed.

Likely Next

The government will monitor revenue buoyancy to see if increased consumption offsets the loss from rate cuts, alongside potential GST Council meetings to fine-tune the 40% 'sin rate' list.

Wildcards

Inflationary spikes in services (if moved from 12% to 18%) or pushback from states if revenue collections fall below expectations without the safety net of the original compensation cess (which was eliminated in this overhaul).

Why UPSC Cares

Syllabus Topics

• Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment
• Government Budgeting
• Federal structure and GST Council

Essay Angles

• GST 2.0: Balancing Revenue Buoyancy with Social Welfare
• Cooperative Federalism in the Era of Economic Reforms
• The Neo-Middle Class as the Engine of India's Growth

Prelims Likely: Yes

Mains Likely: Yes

Trend Signal: rising

Exam Intelligence

Previous Year Question Connections

• Why was a constitutional amendment needed for GST? (Article 246 inadequacy) — UPSC tests the constitutional basis of GST; GST 2.0 tests the executive's ability to simplify these powers without further amendments.
• GST is a destination-based consumption tax. — GST 2.0 leans heavily into the 'consumption-based' rationale to justify revenue loss from rate cuts.

Prelims Angles

• The new GST 2.0 structure specifically retains the 5% and 18% slabs only.
• The 40% 'sin rate' now includes items that previously faced the 28% slab plus cess.
• GST rates on insurance and medicines have been slashed to 0% or 5% under the new regime.
• The 101st Constitutional Amendment established the GST Council, which remains the deciding body for these rate migrations.

Mains Preparation

Sample Question: Critically analyze the transition from a multi-slab GST regime to the two-slab GST 2.0. To what extent can this overhaul resolve the issues of the Inverted Duty Structure and benefit the 'Neo-Middle Class' while maintaining fiscal prudence?

Answer Structure: Intro: Define GST 2.0 and the shift to 5/18 structure → Body 1: Benefits of simplification (Compliance, IDS correction, MSME ease) → Body 2: Consumer impact (Bachat Utsav, 375 items price drop) → Critical Analysis: Potential revenue shortfall and impact on State finances → Way Forward: Suggest revenue buoyancy through technology and wider tax base.

Essay Topic: Simplification as the Ultimate Sophistication: The Case of India's Indirect Tax Reforms.

Textbook Connections

Key Takeaway

GST 2.0 is a pivot from 'revenue-first' to 'consumption-first' taxation, aiming to simplify the federal tax structure into two main slabs while resolving structural manufacturing hurdles like IDS.

All Events in This Story (6 items)

1. 2025-08-16 [Economy] — Major GST Shake-up Proposed
   The Centre has proposed a significant overhaul of the Goods and Services Tax (GST) system by reducing the number of tax slabs, retaining the 5% and 18% slabs, introducing a lower concessional rate below 1%, and a higher 'sin rate' of 40% on a limited number of items. This involves eliminating the 12% and 28% tax brackets, moving 99% of items from the 12% slab to 5%, and 90% of items from the 28% bracket to 18%. There will be no cess of any kind over and above the GST rates.
   More details

   UPSC Angle: Proposed GST overhaul: reducing slabs, retaining 5% and 18%.

   Key Facts:

   • To be implemented by Diwali 2025
   • Includes two main GST rates (5% and 18%)
   • A special 40% rate for select sin and luxury goods
   • Aims to simplify tax compliance, reduce rates on essentials, and address inverted duty structures
   • GST
   • 5%
   • 18%
   • 1%
   • 40%
   • 12%
   • 28%
   • 99%
   • 90%
2. 2025-08-16 [Economy] — Congress Demands Discussion on GST 2.0
   The Congress party has called for an official discussion paper on GST 2.0, advocating for a simpler and more effective tax system that supports economic growth.
   More details

   UPSC Angle: Congress demands discussion on GST 2.0.

   Key Facts:

   • GST 2.0
3. 2025-08-17 [Economy] — PM Modi Urges States to Implement GST Reforms Before Diwali
   Prime Minister Narendra Modi has urged states to cooperate in implementing the next generation of GST reforms before Diwali, emphasizing that the reforms would benefit the poor, middle class, and businesses. The Centre has circulated the draft of the proposed reforms among states.
   More details

   UPSC Angle: PM urges states to implement GST reforms before Diwali.

   Key Facts:

   • Narendra Modi
   • GST reforms
   • Diwali
   • PM Narendra Modi urged States to cooperate in implementing proposed GST reforms.
   • The Centre has circulated the draft of the next-generation GST reforms among States.
4. 2025-08-18 [Economy] — New GST Regime to be Consumer-Centric
   The Indian government has announced that the new Goods and Services Tax (GST) regime, previewed by Prime Minister Narendra Modi during his Independence Day address, will be consumer-centric. The emphasis will be on benefiting the poor, MSMEs, the middle class, and farmers.
   More details

   UPSC Angle: New GST regime to be consumer-centric.

   Key Facts:

   • The new GST regime will be consumer-centric.
   • It will focus on the poor, MSMEs, the middle class, and farmers.
5. 2025-09-22 [Economy] — GST 2.0 Implementation
   Prime Minister Narendra Modi has termed the implementation of the new two-slab Goods and Services Tax (GST) regime a “bachat utsav” (festival of savings) and the first step towards “aatmanirbharta” (economic self-reliance) for Indians. The new GST regime is set to be rolled out at midnight on September 21, 2025. Steep discounts, extra grammage, or other deals such as shopping vouchers are being offered by companies ahead of the rollout of GST 2.0 effective from midnight, that is, September 22.
   More details

   UPSC Angle: Not exam-relevant

   Key Facts:

   • New GST structure retains only 5% and 18% slabs.
   • Taxes on essentials like food, medicines, and insurance reduced to 0% or 5%.
   • Expected to save INR 2.5 lakh crore annually.
   • PM Modi spotlighted the Neo-Middle Class—a dynamic group of 25 crore Indians who have recently risen out of poverty.
   • GST rates on about 375 items were slashed, making goods cheaper.
   • A compensation cess is levied only on tobacco and related products.
   • Revised GST rates and exemptions effective from September 22, 2025.
   • Simplified GST structure with two main slabs: 5% and 18%.
   • 40% GST rate on luxury and sin goods.
   • GST exemptions on life and health insurance premiums.
6. 2025-09-23 [Economy] — Economic Rationale of GST 2.0
   GST 2.0 aims to boost household consumption through lower GST rates, expected to increase disposable income and spur demand. The government intends to offset revenue loss from cuts on over 375 items through higher consumption. It also seeks to correct the Inverted Duty Structure (IDS), which occurs when the input tax rate is higher than the output tax rate, leading to capital blockage.
   More details

   UPSC Angle: GST 2.0 aims to boost household consumption through lower GST rates.

   Key Facts:

   • Lower GST rates to boost household consumption
   • Correcting Inverted Duty Structure (IDS)
   • IDS: Input tax rate > output tax rate