Outline for GST 2.0

The eight-year journey of goods and services tax (GST) has been much like the mythological story of the churning of the ocean by the devas: The toxins of transition, aided by technical glitches in the system software, surfaced early—but now we are seeing the nectar of higher revenues, with two consecutive months of gross GST revenues exceeding ₹2 trillion.

- V.S. Krishnan

While GST reform was truly transformational, some work remains. The tariff winds are nudging policymakers to rationalise GST rates. The key point here is that rate rationalisation should not be viewed in isolation as a revenue exercise, but as one integrated with trade policy and broader macroeconomic objectives. In its trade negotiations with the UK, EU, and the US, India is seeking greater market access for labour-intensive manufacturing sectors such as textiles, leather, food processing, and toys. It logically follows that domestic taxes on products of these sectors must be at the merit rate under GST. The critical question, then, is what that merit rate should be. There is a strong case for making the merit rate 8 per cent instead of 5 per cent. Otherwise, crucial input tax credits (ITC) will accumulate and these products will not be able to fully utilise ITC on key imports.

On the import policy side, all single-use inputs and intermediates used in these four sectors should bear zero import duty, along with a waiver of all non-trade barriers, including quality control orders. This integration between GST rate rationalisation and trade policy will stimulate employment by raising the employment elasticity of investment, which has dropped from 0.44 in 2000 to 0.16 in 2024.