GST 2.0: A New Era of Economic Freedom for India

Introduction

Imagine India where the tax system is not a confusing maze but a clear, well-lit path. As the festive season of Diwali 2025 approaches, India stands on the brink of a monumental tax reform. In a significant announcement on the 79th Independence Day, Prime Minister Narendra Modi unveiled the “next-generation” GST¹ reforms, signaling a decisive move to simplify the tax structure, empower citizens and businesses, and stimulate economic growth. This transformative agenda, dubbed “GST 2.0,” is grounded in three core pillars: structural reforms, rate rationalization, and easing the doing of business. It is a “Diwali gift” that promises to make a tangible difference in the lives of millions, from the common consumer to the smallest of enterprises.

The Three Pillars of GST 2.0

The proposed reforms are not merely a cosmetic change but a comprehensive overhaul of the existing tax framework. The government’s proposal, already endorsed by the GoM² on Rate Rationalisation, focuses on:

Structural Reforms: This pillar is aimed at fixing long-standing issues within the GST system. A key focus is the correction of the inverted duty structure, where the tax on inputs is higher than on the final output. By adjusting input and output tax rates, the government aims to reduce the accumulation of ITC³, which has been a major drain on businesses’ working capital, particularly in sectors like chemicals, pharmaceuticals, and construction. Furthermore, the reforms seek to resolve classification disputes, providing stability and predictability for businesses and reducing litigation.

Rate Rationalisation: This is perhaps the most visible and impactful change for the average consumer. The plan is to simplify the existing four-rate slab system into just two primary slabs: 5% for essential goods and 18% for standard goods. The 12% and 28% slabs are expected to be eliminated. This will result in a notable shift for a wide array of products. For instance, approximately 99% of items currently taxed at 12% are likely to move to the lower 5% slab, leading to significant price reductions on everyday essentials. At the other end of the spectrum, around 90% of items in the 28% slab, including white goods and certain automobiles, will likely shift to 18%. To maintain revenue and align with social objectives, a new, higher 40% GST rate may be introduced for “sin goods” like tobacco and pan masala, and possibly online gaming.

Ease of Living: This pillar directly addresses the pain points of compliance for businesses, especially for MSMEs. The reforms will introduce pre-filled GST returns to reduce manual effort and minimise mismatches. It also promises smoother, tech-based registration for new businesses and faster, automated refunds for exporters and inverted duty cases. These changes aim to simplify the process, cut compliance costs, and encourage the formalisation of the unorganized sector.

Impact and Implications for Consumers and Businesses

The upcoming reforms are poised to create a ripple effect across the economy. For consumers, the changes translate to a tangible reduction in the cost of living. Products like electronics, small cars, and daily-use items like toothpaste and umbrellas are expected to get cheaper. The possible rationalization of GST on health and life insurance premiums could also make these critical services more accessible to a broader population. This increased affordability is expected to boost consumption, thereby stimulating market demand and economic activity. 

For businesses, the transition presents both opportunities and challenges. While the simplified tax structure promises reduced compliance costs and fewer classification disputes, businesses must prepare for a smooth transition. This includes updating their ERP and POS systems to reflect the new rates accurately and consistently across all sales channels from physical stores to e-commerce platforms. A major consideration for companies will be deciding how to revise product pricing, including MRPs, and whether to fully pass on the GST rate reduction to consumers. The potential revival of anti-profiteering provisions underscores the importance of transparently communicating price changes and justifying revisions with thorough documentation.

The inverted duty structure also remains a key challenge, particularly for businesses where GST rates on input services remain at 18% while the output goods are moved to the 5% slab. While refunds are available for goods, a substantial amount of input tax credit on services and capital goods can accumulate, affecting working capital and profitability. This raises a crucial question for businesses: Should the cost of tax inversion be factored into revised pricing, or is the expectation to pass on the full benefit of the rate reduction to the consumer?

Conclusion

The GST 2.0 reforms represent a significant step in the evolution of India’s indirect tax system. The government’s vision is clear: to move towards a tax system that is more efficient, transparent, and growth-oriented. With the GST Council expected to meet in October 2025 to finalise the proposals, the stage is set for a new chapter. By proactively planning and ensuring transparent communication, both businesses and consumers can look forward to a simpler, more predictable, and more equitable tax regime that will help drive India’s economic growth and foster a truly self-reliant nation.

Citations

1. Goods and Services Tax
2. Group of Ministers 
3. Input Tax Credit

Expositor(s): Adv. Archana Shukla