GST 2.0: Restoring Federal Balance and Fiscal Agency

Subject: Indian Economy / Fiscal Federalism

Summary:

• Context: The Justice Kurian Joseph Committee on Union-State Relations (constituted in 2025) released a landmark report in early 2026 advocating for GST 2.0.
• The Challenge: The report argues that the initial GST “compact” has eroded the fiscal autonomy of States, leaving them in a “fiscal cliff” without the power to raise independent revenue.
• The Proposal: A shift from “coercive federalism” to a “partnership model” involving structural voting changes, decentralization of technology, and limited rate-setting powers for States.

Understanding the Evolution: From GST 1.0 to 2.0

What is GST?

The Goods and Services Tax (GST) is a destination-based indirect tax that replaced a complex web of central and state taxes. It relies on the Input Tax Credit (ITC) mechanism to eliminate the “tax-on-tax” cascading effect.

The Historical “Compact”

• Article 246A: Grants simultaneous power to Union and States to tax goods and services.
• Compensation Guarantee: To encourage states to join, the Union guaranteed a 14% annual revenue growth for 5 years, which ended in June 2022.
• Compensation Cess: Extended until March 31, 2026, but solely to repay loans taken during the pandemic, not to bridge current state revenue gaps.

Recent Reforms (The 2025 Transition)

In late 2025, the GST Council initiated a “Next Gen” simplification to address the complexity of the original system:

• Three-Tier Rate Structure: The 56th GST Council meeting (Sept 2025) simplified the slabs to 5% (Merit), 18% (Standard), and 40% (Demerit/Sin).
• Rationalization: Inconsistencies (like the “bun vs. packaged bun” dispute) were resolved to stop “micro-classification” litigation.
• Apparel Threshold: The tax-free limit for apparel was hiked to ₹2,500 to aid low-income consumption.

Why GST 2.0 is Needed: The Justice Kurian Joseph Findings

The committee highlights five “structural failures” in the current regime:

1. Voting Inequality: The Union’s 1/3rd vote share acts as a de facto veto, as no decision can pass without its consent. This turns the Council into an “appendage of the Union Executive.”
2. Revenue Shortfalls: States like Kerala and Punjab are facing shortfalls of 36% to 50% after the compensation ended, yet they cannot adjust taxes to meet local crises (e.g., floods or health emergencies).
3. Broken Digital Architecture: The GST Network (GSTN) has failed in its original promise of “invoice matching.” Reliance on self-declared GSTR-3B returns has led to massive fake-invoice frauds.
4. Legislative Erosion: State Assemblies have lost control over nearly 44% of their own-tax revenue, making them passive observers of the GST Council’s decisions.
5. Compliance Asymmetry: Compliance costs as a percentage of turnover are significantly higher for MSMEs than for large corporations.

The “Way Ahead”

The Committee proposes a “GST 2.0” framework based on five pillars:

Pillar	Recommendation
Voting Power	Reduce Union vote share to 20% or move to “One Member, One Vote.”
Leadership	Introduce Rotational Chairpersonship (Union and States take turns leading the Council).
Fiscal Agency	Allow States to vary their SGST component by a small band (e.g., +/- 2%).
Technology	Decentralize GSTN into a federated architecture (like UPI) for state-specific audits.
Dispute Resolution	Establish an Independent Dispute Settlement Authority chaired by a retired SC Judge.

Examination Focused MCQs

Q1. The Justice Kurian Joseph Committee on Union-State Relations has recently advocated for which major tax reform?

A) Direct Tax Code (DTC)

B) GST 2.0

C) Abolition of Corporate Tax

D) Introduction of Wealth Tax

Q2. Under the simplified three-tier GST structure approved in late 2025, what is the ‘Demerit/Sin’ rate for luxury goods?

A) 12%

B) 28%

C) 40%

D) 50%

Q3. Which Article of the Indian Constitution grants the Union and State governments simultaneous powers to levy GST?

A) Article 246A

B) Article 280

C) Article 370

D) Article 312

Q4. According to the report, what percentage of ‘Own Tax Revenue’ (OTR) control have states lost due to the current GST regime?

A) 10%

B) 25%

C) 44%

D) 80%

Q5. The ‘GST Compensation Cess’ was extended by the government until which specific date?

A) March 31, 2024

B) June 30, 2025

C) March 31, 2026

D) December 31, 2027

Answer Key:

1. B) GST 2.0.
2. C) 40% (Part of the Sept 2025 rate rationalization).
3. A) Article 246A.
4. C) 44%.
5. C) March 31, 2026.