GST 2.0 Reforms 2025: Major Overhaul of Indirect Taxation – Economic Survey 2025-26 Analysis
The Goods and Services Tax (GST), introduced in July 2017, was hailed as India's most significant tax reform since independence. The Economic Survey 2025-26 now highlights that the government has passed "the most radical overhaul of the Goods and Services Tax since its inception in 2017." This article examines these reforms, often referred to as GST 2.0, their rationale, expected impact, and relevance for UPSC aspirants studying Indian taxation.
Background: GST Journey from 2017 to 2025
When GST was launched on July 1, 2017, it replaced multiple central and state indirect taxes with a unified national tax. The reform was transformative – it created a common market, eliminated cascading of taxes, and simplified inter-state trade. However, implementation revealed several challenges.
The initial GST structure had multiple tax rates (0%, 5%, 12%, 18%, 28%), frequent rate revisions, compliance complexities, and technology glitches. Small businesses struggled with the new system. The GST Council, while providing a platform for Centre-State coordination, had to make numerous adjustments to address emerging issues.
Over the years, incremental reforms improved the system. E-invoicing was introduced, input tax credit mechanisms were tightened, and compliance processes were streamlined. However, more fundamental structural reforms required comprehensive legislation, which the 2025 overhaul represents.
Key Features of GST 2.0 Reforms
While the Economic Survey 2025-26 does not provide exhaustive details of every provision, it emphasizes the scale and significance of the reforms. Based on the survey's characterization of this as the most radical overhaul since inception, the reforms likely address several long-standing issues:
Rate Rationalization: The proliferation of tax rates under the original GST created classification disputes and compliance complexity. GST 2.0 likely moves toward fewer, more clearly defined rate slabs, reducing ambiguity and litigation.
Simplified Compliance: The compliance burden on small businesses has been a persistent concern. The reforms are expected to further simplify return filing, extend composition scheme benefits, and reduce the frequency of compliance requirements for smaller taxpayers.
Inverted Duty Structure Resolution: Some sectors faced inverted duty structures where the tax rate on inputs exceeded the rate on outputs, leading to accumulated input tax credits that businesses could not utilize. The reforms address these anomalies to improve working capital for affected industries.
Improved Input Tax Credit Mechanism: The reforms likely strengthen the ITC matching system while ensuring genuine business credits are not denied due to technical issues or supplier defaults.
Petroleum and Real Estate Integration: Petroleum products and some real estate transactions remained outside GST's ambit. The reforms may take steps toward their eventual integration, moving closer to a comprehensive GST as originally envisioned.
Expected Impact on Business and Economy
The Economic Survey 2025-26 positions these GST reforms as part of the government's response to external challenges, particularly US tariffs. By improving the domestic business environment, the reforms aim to enhance India's competitiveness.
Reduced Compliance Costs: Simpler procedures and clearer rules reduce the time and resources businesses spend on tax compliance. This is particularly important for MSMEs that often lack dedicated tax departments.
Improved Cash Flow: Faster refunds, resolution of inverted duty issues, and streamlined ITC mechanisms improve cash flow for businesses, enabling them to invest and grow.
Enhanced Formalization: A simpler tax system encourages informal businesses to join the formal economy, broadening the tax base and improving revenue over time.
Manufacturing Competitiveness: By addressing input cost issues and compliance burdens, the reforms support the government's broader push to make Indian manufacturing globally competitive.
Revenue Implications
GST reforms that simplify the structure and improve compliance typically have positive long-term revenue implications even if short-term impacts are mixed. The survey's confidence in fiscal consolidation despite these reforms suggests that the revenue impact has been carefully calibrated.
A simpler system with better compliance tends to increase the tax base over time. While rate rationalization may reduce rates in some areas, improved compliance and reduced evasion often compensate. International experience suggests that simple tax systems collect more revenue than complex ones because complexity creates opportunities for evasion and avoidance.
GST Council: The Institutional Framework
The GST Council, comprising Union and State Finance Ministers, remains the institutional heart of GST governance. Any major reform requires consensus-building in this body, making the passage of GST 2.0 a significant achievement of cooperative federalism.
The fact that such comprehensive reforms could be passed demonstrates the maturation of the GST Council as an institution. Early years saw frequent friction between Centre and States, particularly on compensation and rate issues. The ability to agree on fundamental structural reforms indicates improved coordination and trust.
Comparison with Global GST/VAT Systems
India's GST is now one of the world's most complex unified indirect tax systems, covering a country of 145 crore people across 28 states and 8 union territories. The reforms bring India's GST closer to international best practices seen in countries like New Zealand, Singapore, and Australia.
International benchmarks suggest that effective GST systems typically have 2-3 rate bands, minimal exemptions, comprehensive coverage, and simple compliance procedures. GST 2.0 moves India in this direction while recognizing the unique challenges of India's federal structure and developmental needs.
Timeline for Implementation
Major tax reforms typically involve implementation phases to allow businesses and tax administrators to adapt. The survey's mention of the reform being "passed" suggests the legislative framework is in place, with implementation likely to be phased over FY26 and beyond.
Transitional arrangements will be important for businesses that have organized their operations around the existing structure. The government's experience with the original GST transition in 2017 provides valuable lessons for managing this change smoothly.
Integration with Digital Infrastructure
GST reform is closely linked with India's digital public infrastructure. The GST Network (GSTN) has become one of the world's largest tax technology platforms, processing billions of invoices and returns. GST 2.0 likely leverages this digital backbone for enhanced compliance verification and taxpayer services.
E-invoicing, QR codes, real-time reporting, and data analytics for risk-based audit selection are areas where technology enables both compliance simplification and enforcement effectiveness. The reforms probably expand these capabilities while ensuring data privacy and security.
UPSC Relevance: GST and Indirect Taxation
GST is a perennial favorite in UPSC examinations:
- Prelims: Constitutional provisions, GST Council structure, tax rates
- Mains: Advantages and challenges of GST, Centre-State coordination
- Economy Optional: Detailed understanding of indirect taxation
- Current Affairs: Recent reforms and revenue trends
Practice MCQs on GST Reforms - Economic Survey 2025-26
Q1. According to Economic Survey 2025-26, the 2025 GST reforms represent:
(a) Minor adjustments to rates
(b) The most radical overhaul since GST inception in 2017
(c) Abolition of GST
(d) Merger with income tax
Answer: (b) The most radical overhaul since GST inception in 2017
Q2. GST in India was introduced in:
(a) July 2016
(b) April 2017
(c) July 2017
(d) January 2018
Answer: (c) July 2017
Q3. The GST Council is constituted under which Article of the Constitution?
(a) Article 246A
(b) Article 269A
(c) Article 279A
(d) Article 366
Answer: (c) Article 279A
Q4. Which of the following products is currently outside the GSbit's ambit?
(a) Textiles
(b) Petroleum products
(c) Electronics
(d) Automobiles
Answer: (b) Petroleum products
Q5. 'Inverted duty structure' in GST refers to:
(a) Higher tax rates in urban areas
(b) Input tax rate higher than output tax rate
(c) Export duty higher than import duty
(d) Central rate higher than State rate
Answer: (b) Input tax rate higher than output tax rate
Conclusion
The GST 2.0 reforms highlighted in the Economic Survey 2025-26 mark a significant milestone in India's indirect tax journey. By addressing structural issues that accumulated over eight years of GST implementation, these reforms position India's tax system for greater efficiency and competitiveness. For businesses, the promise is reduced compliance burden and improved operating environment. For the economy, the expectation is enhanced formalization, better revenue efficiency, and support for manufacturing competitiveness. As implementation unfolds, these reforms will reshape India's indirect tax landscape for years to come.