Last Updated: May 2026
GST 2.0 — UPSC GS3 framework
For UPSC GS3 GST 2.0 reforms 2027, India’s Goods and Services Tax has entered a structural reform phase. The 56th GST Council meeting (September 2025) cleared major rationalisation, simplified slabs, and triggered debate on compensation cess termination. For Civil Services aspirants, this topic intersects fiscal federalism (GS2), tax architecture (GS3), and ethical governance (GS4) — high-yield across multiple papers.
Fact Sheet — GST in 2026
| Aspect | Detail |
|---|---|
| GST in force since | 1 July 2017 |
| Constitutional basis | 101st Amendment Act 2016 (introducing Articles 246A, 269A, 279A) |
| GST Council | Constituted under Article 279A |
| Latest Slabs (2026) | 0%, 5%, 18%, 40% (post-rationalisation) |
| Earlier Slabs | 0%, 5%, 12%, 18%, 28% + cess (5 slabs) |
| Monthly Avg Collection (FY26) | ₹1.85 lakh crore |
| Compensation Cess | Originally for 5 years (till June 2022); extended to March 2026 for loan repayment |
GST 2.0 — Five Key Reforms
1. Slab Rationalisation
From the original 5-slab structure (5%, 12%, 18%, 28% + cess), GST 2.0 reduces to 4 slabs: 0%, 5%, 18%, 40%. The 40% slab applies only to “sin goods” (tobacco, pan masala, gutkha, certain gambling) — replacing the 28%+cess hybrid. Simplification reduces classification disputes and litigation.
2. Compensation Cess Sunset
The compensation cess on luxury and sin goods was introduced under Section 8 of the GST (Compensation to States) Act 2017 to compensate states for revenue loss. The cess stands extended to March 2026 to repay borrowings made during COVID-19 to compensate states. From April 2026 onwards, the cess design transitions — the 40% slab absorbs the sin-good levy.
3. Inverted Duty Structure (IDS) Correction
Where input tax exceeds output tax (as in textiles, fertilisers), refunds were procedurally cumbersome. GST 2.0 introduces faster refund mechanisms and rate corrections to eliminate IDS in 14 sectors.
4. Threshold Increase for Composition Scheme
- Threshold for goods raised to ₹2 crore (from ₹1.5 crore)
- Service threshold raised to ₹75 lakh (from ₹50 lakh)
- Service tax rate for composition reduced from 6% to 5%
5. E-Invoicing & Compliance Simplification
E-invoicing extended to firms with turnover > ₹5 crore (earlier ₹10 crore). Quarterly Return Monthly Payment (QRMP) scheme expanded to firms with turnover ≤ ₹5 crore. Simplified GSTR-3B with auto-populated GSTR-1 reduces compliance burden.
GST Council — Structure & Voting
- Chairperson: Union Finance Minister
- Members: Union MoS Finance + State Finance/Taxation Ministers
- Quorum: 50% of total members
- Decision: 75% weighted majority. Centre weight = 1/3; total state vote = 2/3 collectively (each state weighted by population × tax revenue ratio)
- Recent SC ruling: Mohit Minerals (2022) — Council recommendations are not binding but persuasive (federalism in action)
Constitutional Architecture
- Article 246A: Both Centre and States have concurrent power to levy GST. Inter-state trade is exclusive Union (Art. 269A).
- Article 269A: IGST on inter-state trade is collected by Centre, apportioned via Council recommendation.
- Article 279A: GST Council itself, with 75% weighted majority and federal voting structure.
- Article 286: States cannot tax inter-state imports/exports — Centre’s exclusive purview.
Fiscal Federalism Issues
| Issue | Concern | 2.0 Response |
|---|---|---|
| Compensation Cess Sunset | States dependent on cess revenue lose ~10-15% transfers | Cess extended to Mar 2026; 40% slab absorbs going forward |
| State Autonomy | States cannot independently tax goods/services | SGST collection retained by states; Council voting protects state interest |
| Council Decisions | SC ruling makes them recommendatory | Centre and states must build consensus rather than rely on majority |
| Petroleum & Alcohol Outside GST | States retain VAT autonomy on these | No 2.0 change — states retain |
Pros and Cons of GST 2.0
Strengths
- Slab simplification reduces classification disputes
- Faster refunds for IDS sectors improve cash flow
- Composition threshold rise eases small business compliance
- E-invoicing improves tax buoyancy and compliance
Concerns
- 40% slab on sin goods is high; may incentivise smuggling, parallel markets
- Compensation cess sunset hits states with high luxury-good consumption (Maharashtra, Karnataka, Delhi)
- Petrol, diesel, alcohol, electricity remain outside GST — incomplete reform
- Inverted duty structure remediation is sector-specific, not systematic
Mains Answer Writing Framework (250 words)
Q. Discuss the structural reforms introduced under GST 2.0 and their implications for fiscal federalism in India.
Sample frame:
- Intro (40 words): Brief on GST since 2017; 56th Council meeting Sep 2025 ushered GST 2.0; reforms aim to simplify slabs, end compensation cess, ease compliance.
- Structural reforms (80 words): 4-slab structure (0/5/18/40), IDS correction, compensation cess sunset, threshold increase, e-invoicing extension.
- Fiscal federalism implications (100 words): States lose cess revenue, but 40% slab absorbs sin-good levy; Mohit Minerals SC ruling makes Council recommendations persuasive; states retain SGST collection; petroleum/alcohol still outside; council voting structure protects state veto.
- Way forward (30 words): Bring petroleum/alcohol into GST; institutionalise compensation mechanism beyond 2026; bolster council consensus norms.
FAQ
What are the new GST slabs in 2026?
0%, 5%, 18% and 40% (sin goods only). The earlier 12% and 28%+cess slabs were merged or absorbed in GST 2.0 reforms.
Why was GST Council described as “recommendatory” by SC?
In Mohit Minerals (2022), SC held that GST Council recommendations are not binding on Parliament/states; they are persuasive. This preserves federalism and parliamentary sovereignty.
When does GST compensation cess end?
Compensation cess was originally to end June 2022; extended to March 2026 to repay COVID-era borrowings to states. From April 2026 onwards, the 40% slab absorbs the sin-good levy.
Are petrol and alcohol under GST in 2026?
No — petroleum products (petrol, diesel, ATF, natural gas, crude) and alcohol for human consumption remain outside GST. States retain VAT/excise autonomy. Bringing them under GST is a long-pending reform.
