Two-Rate GST System

Two-Rate GST System

Why in News Two-Rate GST System? 

Recently, the Prime Minister in his Independence Day speech spoke about reforms in the Goods and Services Tax. The plan may bring a shift towards a two-rate GST system. The move aims to make taxation simpler and fairer, reflecting a step towards structural reform and ease of living.

Introduction of Goods and Services Tax (GST)

• About: The Goods and Services Tax (GST) is a comprehensive tax system that unifies indirect taxes across India. It was introduced on 1st July 2017 after years of debate and consultation. 

• GST brought together several indirect taxes including excise duty, service tax, and value-added tax into a single system.

• The central idea behind GST is to establish “One Nation, One Tax, One Market.” 

• It covers both goods and services under one framework and aims to simplify the tax process for citizens as well as businesses.

• Background: Before GST, India followed a fragmented tax structure where every state had its own system. Taxes overlapped, creating confusion and higher costs. For example, goods were taxed multiple times during production and transportation. This cascading effect of taxes raised prices for the end consumer. The government realized that a single indirect tax could reduce these inefficiencies. GST emerged as a reform to ensure transparency and to minimize tax burdens.

• Constitutional Framework: The idea of GST required a major constitutional amendment. The 101st Constitutional Amendment Act, 2016 gave legal backing to implement GST in India. 

• A Goods and Services Tax Council was established to act as the main authority for decision-making. This council includes representatives from the Centre and States, chaired by the Union Finance Minister. 

• This Council holds the responsibility of determining tax rates, granting exemptions, and framing procedural guidelines. 

• This cooperative structure ensures that both Union and State governments participate in shaping GST policies.

• Components: GST in India is divided into three major components:

• • • CGST (Central Goods and Services Tax) is a share amount collected by the union centre government on sales happening within a state.
    • SGST (State Goods and Services Tax) is collected by individual state governments on sales that occur within their own boundaries.
    • IGST (Integrated Goods and Services Tax) is applied on sales between states and is collected by the central government.

• GST Implementation: A unique feature of GST is its digital backbone, the GST Network (GSTN). This platform manages registration, returns, and tax payments. The system brings accountability because transactions are tracked online. 

• Businesses upload invoices, and the system matches them to prevent fraud. 

• The e-way bill mechanism tracks the movement of goods across state borders to maintain transparency and prevent tax evasion.

Evolution of the GST Framework in India

• The idea of a unified indirect tax system in India was first proposed in the year 2000. A committee was set up under the leadership of the Finance Minister to design a model for Goods and Services Tax. 
• The first draft of the GST framework was discussed in 2003 when the Kelkar Task Force on Indirect Taxes suggested that a unified tax system could improve efficiency and reduce cascading effects.
• In 2006, the Union Finance Minister in the Budget Speech announced a plan to implement GST by 1st April 2010.
• After continued discussions, the Empowered Committee of State Finance Ministers presented the First Discussion Paper on GST in 2009.
• The process required constitutional support, so in 2011, the government introduced the 115th Constitutional Amendment Bill in Parliament to give legal backing to GST. 
• After the change of government in 2014, the push for GST gained new momentum. In December 2014, the 122nd Constitutional Amendment Bill was introduced in Parliament to pave the way for GST.
• In August 2016, the Rajya Sabha passed the 122nd Amendment Bill, which later became the 101st Constitutional Amendment Act, 2016. 
• The GST Council was officially formed in September 2016. It included the Union Finance Minister as the Chairperson, the Union Minister of State for Finance, and finance ministers from all states. 
• The government launched GST from 1st July 2017. The President and Prime Minister inaugurated the new tax system in a special session of Parliament. 

Also Read: GST Collection Rises by 16.4% in May 2025

Understanding the Current Multi-Rate GST Structure

The Goods and Services Tax (GST) in India uses a multi-rate system to classify goods and services. This approach was designed to balance revenue needs with affordability. 

• Zero Percent GST Slab: Some goods and services are completely exempt from GST and fall under the 0% slab. This category includes fresh fruits, vegetables, milk, eggs, cereals, and unprocessed food items. 

• Five Percent GST Slab: The 5% slab covers goods and services that are essential but have some commercial value. Examples include packaged food, footwear below certain price limits, and household necessities. Some services like economy class railway travel and small restaurants also fall under this category. 

• Twelve Percent GST Slab: The 12% GST rate applies to products that are slightly higher in value or processed for convenience. Items such as fruit juices, processed foods, computers, and certain chemicals are taxed at this rate. Certain healthcare services and mid-range consumer products are also included.

• Eighteen Percent GST Slab: The 18% slab is the most common rate and applies to the majority of goods and services. This includes electronics, consumer durables, hospitality services, telecom, and industrial supplies. Items that are widely used by the general public but not considered basic.

• Twenty-Eight Percent GST Slab: The 28% slab applies to luxury and sin goods. The higher tax slab includes products such as luxury vehicles, tobacco, premium electronics, and aerated drinks. The higher rate discourages excessive consumption of such goods and raises additional revenue.

About the Two-Rate GST System

• The Two-Rate GST system is a proposed reform aimed at simplifying India’s existing multi-rate tax framework. 
• The idea of a simplified GST structure has been discussed in the GST Council meetings since 2021.
• Under this system, instead of the existing five tax slabs, goods and services will be categorized into two main rates.
• The idea of two rates is to group goods and services into essential items and standard or luxury items. 
  • Essential Goods and Services: These would attract a lower tax rate. This category includes necessities such as food items, basic household goods, and essential services.
  • Standard or Non-Essential Goods and Services: These would attract a higher tax rate, covering luxury items, discretionary goods, and high-value services.
• The implementation of a two-rate GST system will require reclassification of all goods and services into two categories. 
• Each item will be assigned either the lower or higher rate based on its essentiality and consumption patterns. 
• The GST Council will play a central role in finalizing the two-rate framework. It will decide which goods and services fall under the lower and higher slabs. 

Potential Benefits and Challenges of the Two-Rate GST Reform

• Potential Benefits:

• • Simplified Tax Compliance: One major advantage of the two-rate GST system is that it simplifies compliance for businesses. By reducing five GST rates to two main rates, businesses can categorize goods and services more easily. This reduces errors in invoicing and filing returns. Small and medium enterprises, which often struggle with GST compliance, will find it easier to adapt. 
  • Reduce Administrative Burden: The reform will lower the administrative workload for both the government and taxpayers. With only two rates, audits and assessments can be conducted more efficiently. Data from GST Council reports 2022-23 suggest that a simplified rate structure can reduce compliance costs by over 20% for small traders. 
  • Predictability: A two-rate system can enhance transparency in the tax framework. Taxpayers will clearly know which category a product belongs to. The risk of misclassification and disputes will decline significantly. Predictable taxation also helps businesses plan pricing strategies and budgeting. This reform encourages investment and business growth by creating a more predictable and stable economic environment.
• Challenges:
  • Revenue Distribution Concerns: One challenge of the two-rate GST system is managing revenue between the Centre and States. Currently, multiple rates help balance tax collections across sectors. Consolidating into two rates may impact total revenue. Some high-rate goods may shift to a lower slab, reducing government earnings. The GST Council will need to carefully assess the impact on inter-state revenue sharing. 
  • Categorization Disputes: Another challenge lies in deciding which goods and services fall under the lower or higher rate. Essential goods are generally placed at a lower rate, while luxury items are taxed higher. Borderline products may create disagreements among businesses, states, and tax authorities. For example, processed food items or premium healthcare services could generate debate over proper classification.
  • Transitional Challenge: Transitioning from a five-rate to a two-rate system is not simple. During the transition, businesses are required to revise accounting methods, upgrade billing systems, and reclassify their products. Training staff and educating stakeholders will require time and resources. Historical data and invoices may also need adjustments to match the new structure. In the initial phase, errors and delays in filings are likely.