What was GST 2.0, and was it a step in the right direction?

For its first eight years, India’s GST had too many rates: 0, 5, 12, 18, and 28%, plus cesses, which made it, in the IMF’s word, an “outlier”; most countries run one to three. On 22 September 2025 the government finally simplified it. “GST 2.0,” announced at the 56th GST Council meeting, scrapped the 12% and 28% slabs and folded their items into two main rates, 5% for essentials and everyday goods and 18% as the standard, with a new 40% rate kept for a handful of sin and luxury goods such as tobacco, fizzy drinks, and big cars. Around 175 items got cheaper, from cement and small cars to shampoo and packaged snacks; health and life insurance premiums were cut to zero (PIB).

On its own terms, this was a genuine improvement. Fewer slabs mean fewer of the classification fights that plagued the old system (see “Why do tax reformers keep repeating ‘broad base, low rate, simple rules’?”), and less conflict over whether a cream is a cosmetic or a medicine. The government also paired it with faster refunds and a fix for some inverted-duty cases, easing the credit problems critics had flagged (see “Is India’s GST a real VAT?”). For consumers and for compliance, it was a step forward.

But “the right direction” depends on where you think the destination lies. To the reformers who wanted a single low rate on a broad base, GST 2.0 went only halfway, and in some respects the wrong way. It made the structure simpler without making the base wider: the big exemptions for health, education, and insurance stayed, and were even extended, so the broken credit chains they create remain (see “If something is GST-exempt, why isn’t it cheaper?”). Fuel and electricity are still outside GST altogether. And by moving so many goods down to 5% and 18%, it pushed the effective tax rate lower. The government itself put the revenue cost at about ₹48,000 crore a year, betting that cheaper goods would spur enough extra spending to make up the gap. The IMF’s worry is that this moves India further from the rate at which GST pays for itself, not closer (see “How has GST performed as a source of revenue?”).

There is also a road not taken. The cleaner way to tax cigarettes and luxury cars is a separate excise on top of one ordinary GST rate, not a special 40% GST slab, which keeps a high rate, and its classification disputes, inside the very system the reform was trying to simplify.

So GST 2.0 was a real step, and mostly a good one: simpler, cheaper, less litigious. But it treated the symptom, too many rates, more than the disease, leaving the exemptions, exclusions, and revenue erosion that keep India’s GST short of the clean, broad, single-rate tax it was meant to become.