I. Context of Discussion: GST council meet on Sep 3 and Sep 4 brought structural changes in GST rates. Rationalizing the tax structure is always considered good. This will have larger impact on consumption pattern; ease the burden on lower middle-class consumer’s especially urban consumers reviving growth.
So, in the midst of this, we will try to understand the impact of these reforms in reviving the growth.
II. Conceptual Background
Problems with the Pre-GST Era
- No uniform tax rates across states; additional levies like entry tax raised costs. This leads to price differences across states.
- Different rules for returns, audits, and penalties created confusion.
- Weak input tax credit provisions allowed misuse and tax evasion.
- Double taxation (VAT plus service tax) increased the burden on both producers and consumers.
Before the launch of the Goods and Services Tax (GST), India’s indirect tax system was highly fragmented. Every state followed its own tax rates, levies, and procedures, making trade across India complicated and compliance-heavy. Businesses often faced overlapping taxes, inconsistent rules, and limited credit for inputs. To overcome these challenges, GST was conceived as a unified national tax system.
The idea of GST was first proposed in 2000 with an Empowered Committee of State Finance Ministers set up to study sales tax reforms. Taking this idea forward and with extensive consensus building among states, the 101st Constitutional Amendment Act was passed and ratified in 2016, paving the way for GST. GST was formally rolled out at midnight on 1st July 2017, hailed as a “path-breaking legislation for New India.”
GST Subsumed 17 different taxes and 13 cesses into one unified tax. It eliminated cascading of taxes (tax on tax). It created a single national market with common rates and procedures. It symbolizes economic integration of the country.
As per Article 279A of the amended Constitution, the GST Council is a joint forum of the Centre and the States, and consists of Union finance minister as chairperson, union minister of states in charge of revenue, finance as member and the Minister In-charge of Finance or Taxation or any other Minister nominated by each State Government as members.
The Council is empowered to make recommendations to the Union and the States on the following: –
(a) The taxes, cesses and surcharges levied by the Union, the States and the local bodies which may be subsumed in the goods and services tax;
(b) The goods and services that may be subjected to, or exempted from the goods and services tax;
(c) Model Goods and Services Tax Laws, principles of levy, apportionment of Integrated Goods and Services Tax and the principles that govern the place of supply;
(d) The threshold limit of turnover below which goods and services may be exempted from goods and services tax;
(e) The rates including floor rates with bands of goods and services tax;
(f) Any special rate or rates for a specified period, to raise additional resources during any natural calamity or disaster.
GST is levied on the supply of goods and services. Goods and Services Tax Law in India is a comprehensive, multi-stage, destination-based tax that is levied on every value addition. After subsuming majority indirect taxes, GST is a single domestic indirect tax law for the entire country. GST Law comprises of (i) Central Goods and Services Tax Act, 2017 (ii) State Goods and Services Tax Act, 2017 (iii) Union Territory Goods and Services Tax Act, 2017, (iv) Integrated Goods and Services Tax Act, 2017.
Achievements So Far
• Expansion of Tax Base: GST taxpayer base has grown from 66.5 lakh in 2017 to 1.51 crore in 2025, reflecting greater formalization of the economy.
• Record Revenue Growth: FY 2024–25 saw ₹22.08 lakh crore in gross GST collections, doubling in just four years with a CAGR of 18%.
Total taxation Receipts of GOI: 28 lakh crore (BE 2025-26), Size of Budget: 50 lakh crore
• Economic Confidence: Rising collections and active taxpayers reflect stronger compliance, improved systems, and robust economic fundamentals. Average monthly collections have risen to ₹2.04 lakh crore year from ₹82,000 crore in 2017–18.
Effective from 22nd September 2025, the reforms reaffirm India’s commitment to building a simpler, fairer, and growth-oriented GST framework, ensuring both ease of living for people and ease of doing business for enterprises.
Terms
Inverted Duty Structure: It occurs when input tax rate (raw materials) is higher than the output tax rate (finished product). If a textile fabric/ natural rubber attracts a 12% GST (input tax) but the finished garments/tyre attract only 5% GST (output tax), this will create situation of inverted duty structure. The input tax credit on account of inverted duty structure can be claimed where tax on input is higher than the tax on output.
Specific duty/Ad valorem duty: A specific duty is fixed amount of tax charged per unit of a product regardless of its value. Ad valorem duty is levied on the value of the product. Cigarettes/tobacco products are taxed at 28% GST + compensation cess at present which may be taxed at 40% in GST 2.0.
Sin or De merit Goods: These are goods which are not desirable to society. These can be pan masala, tobacco products, soft drinks, carbonated drinks etc. The government levies a higher tax on such goods in order to discourage people; however, these helps generate higher revenue for the government.
Anti-Profiteering Clause: Section 171 of CGST Act 2017 provides that any reduction in rates of taxation on any supply of goods or services or the benefit of input tax credit shall be passed on to the recipient by way of reduction of prices. However, this section has not been there in GST reforms 2.0 and hence it has to be seen how the benefits of reduced tax rates are passed on to the consumers.
Integrated Goods and Services Tax (IGST): It is levied when there is an inter-state transfer of goods and services.
III. GST 2.0 and the Common man: Goods which are consumed on daily basis have relatively inelastic demand and are consumed by both rich and poor. The existing GST rates have increased the cost of thali particularly for the urban consumers. Now, with reduction in rates on many hold goods, the common man will get the dual benefits of income tax exemption up to 12 lakhs rupees along with these reductions.
Reduction of GST from 18% OR 12% to 5% on a host of common man items such as, hair oil, toilet soap bars, shampoos, toothbrushes, toothpaste, Bicycles, Tableware, kitchenware, other household articles, et al.
Reduction of GST from 5% to NIL on Ultra-High Temperature (UHT) milk, Prepackaged and labelled chena or paneer; All the Indian Breads will see NIL rates (Chapati or roti, paratha, parotta, etc.)
Reduction of GST from 12% OR 18% to 5% on almost all of the food items such as packaged namkeens, Bhujia, Sauces, Pasta, Instant Noodles, Chocolates, Coffee, Preserved Meat, Cornflakes, Butter, Ghee, etc.
If you look at these commodities, their demand in inelastic and considering the changing life styles in urban cities, it becomes difficult for the lower strata consumers to manage. For example, one cannot rely on traditional dattoon and hence he needs to use toothpaste and tooth brush paying a higher tax of 12% and 18%. Similar was the situations on dairy products, snacks etc. Hence reduction in GST rates on such products from 18% or 12% to 5% or Nil will bring much needed relief to the consumers. This will also help consumers to switch over to packaged products and high-quality products. This will be a major behavioral shift. This will also help the small scale and cottage industries.
IV. GST 2.0 and Indian Agriculture: Reduction of GST from 12% to 5% on agricultural goods, such as tractors, agricultural, horticultural or forestry machinery for soil preparation or cultivation, harvesting or threshing machinery, including straw or fodder balers, grass or hay mowers, composting machines etc. Fertilizer inputs such as sulphuric acid, nitric acid, and ammonia: GST reduced from 18% to 5%. Correcting the inverted duty structure on Fertilizer inputs will boost domestic fertilizer production and reduce dependence on imports, strengthening self-reliance in agriculture.
This will reduce the cost of production of farmers and can make Indian agricultural goods globally competitive. Finally, domestic consumers will also benefit. The decrease in rates of drip irrigation system and sprinklers from will ensure better irrigation and water management practices.
V. GST 2.0 and MSME: “MSMEs are the backbone of our economy, creating jobs and driving growth. It contributes roughly around 30% to the country’s GDP and contributes largely in employment generation.
Reduced rates on inputs like cement, auto parts, and handicrafts lower costs and make small businesses more competitive. The reduction in GST rates of packaged dairy products, agricultural equipment’s, handicrafts idols and statues, paintings, sculptures, wooden/metal/textile toys and dolls will increase demand and help in their growth.
VI. GST 2.0 and Input tax Credit: The objective of the rate rationalisation is to maintain balance between consumers and producers. While providing relief for the farmers, it is important that the domestic manufacturing does not get adversely impacted. If agriculture machinery is fully exempted (now taxed @5%) the manufacturers/dealers of these goods would not be able to claim input tax credit on the GST paid on raw materials and will have to reverse the ITC paid on the inputs. This would increase their effective tax incidence and cost of production. This may in turn be passed on to farmers in the form of higher prices which in turn would make the measure counterproductive.
Similarly, if drugs/ medicines are fully exempted, the manufacturers/dealers would not be able to claim input tax credit on GST paid on raw materials and will have to reverse the ITC paid on the inputs. This would increase their effective tax incidence and cost of production. This may in turn be passed on to consumers/ patients in the form of higher prices which in turn would make the measure counterproductive.
VII. GST 2.0 and Sin Goods: “Sin goods” are products that are generally considered harmful to the society, which may cause harm to the health, or if they are harmful by a moral prism. This includes alcohol, tobacco, gambling or betting, food products with high fat or sugar content, and so on. Such goods and services are tax higher in a bid to dissuade people from using them. These items were already taxed at 28% GST plus Compensation Cess, resulting in an effective tax rate of nearly 40%. The new 40% slab consolidates the total tax burden under a single rate. Alcohol is currently not under GST.
VIII. GST 2.0 and Health sector: Exemption of GST on all individual life insurance policies whether term life, ULIP or endowment policies and reinsurance, all individual health insurance policies (including family floater policies and policies for senior citizens) thereof to make insurance affordable for the common man and increase the insurance coverage in the country. GST exemptions on life and health insurance premiums will expand financial protection and support the vision of Mission Insurance for All by 2047. Insurance companies avail several services and incur GST for commission payments to agents; IT services availed, advertising, and other administrative expenses. Since now they cannot claim input tax credit, it will be very interesting to see that how and to what extent insurance companies pass on the benefits of exemption to the customers.
Reduction of GST from 12% to NIL on 33 lifesaving drugs and medicines and from 5% to NIL on 3 lifesaving drugs & medicines used for treatment of cancer, rare diseases and other severe chronic diseases. Reduction of GST on all other drugs and medicines from 12% to 5%.
Reduction of GST from 18% to 5% on various medical apparatus and devices used for medical, surgical, dental or veterinary usage or for physical or chemical analysis.
Reduction of GST from 12% to 5% on various medical equipment and supplies devices such as wadding gauze, bandages, diagnostic kits and reagents, blood glucose monitoring system (Glucometer) medical devices, etc.
All these measures will reduce the out of pocket expenditure which is very high in case of people from lower strata. Although out of pocket health expenditure as a percentage of total health expenditure has decreased from 62.6% in 2014-15 to 39% in 2021-22, more efforts were required to attain inclusive healthcare system.
Around 80% of India’s labour force is employed in the informal sector and the remaining 20% is in the formal sector. Of the 80% informal sector workforce, half work in agriculture and the remaining in non-agricultural sectors. There is no social security system and hence reduced GST rates on insurance products will increase the coverage and with reduced premiums even people from labour force also can afford to it.
GST 2.0 and Institutional Reforms: The operationalization of the Goods and Services Tax Appellate Tribunal (GSTAT) will finally provide businesses with a dedicated forum for appeals, ending years of procedural uncertainty. The streamlined slab structure and higher sin taxes may trigger more classification disputes and burden businesses even more with unused input tax credits from inverted duty structures; the GST Council’s commitment to faster refunds offers crucial relief. Small exporters, long disadvantaged by burdensome refund processes, will benefit from the removal of threshold limits on low-value export consignments. The amendment allowing Indian intermediaries to claim export benefits when supplies shift to foreign client locations removes a significant barrier to international trade competitiveness.
GST 2.0 and Indian Economy: This has led to much needed rationalization of tax structure. The existing act has lot of complexities and rates on similar set of commodities were not justified. With reducing the tax slabs largely to two (5% and 18%), it has resolved larger issues.
It will ensure better tax administration, less evasion, more transparency, ease of doing business, more consumption and higher growth. The complexities in tax structure have always led to tax evasion by many companies through fake invoices claiming input tax credit. The rationalization may lead to reduction in revenue for a temporary period but can rebound with sustained growth.
The existing GST rates were more of regressive in nature. This rationalization through reduction in two slabs will ensure more progressive nature. The elimination of compensation cess will create fiscal space for rationalizing and aligning tax rates. These reforms have influenced almost all the sectors of the economy such as construction, education, automobile, and hospitality, pharmaceutical to insurance.
The above revision will also have impact on CPI and WPI head line inflation. The impact will be larger felt on CPI inflation as compared to WPI. The larger impact will be on middle class, small scale sector, construction and real estate, insurance sector, agriculture, automobile, hospitality and pharmaceuticals and many more directly or indirectly. All these may contribute to the country’s GDP Growth rate by 0.3% to 0.5%. All the major institution which started predicting contraction in GDP growth rate now has revised their forecasts. All these will further lead to tax buoyancy.
Challenges in Implementation: Although reduction in GST rates on different products will benefit almost all the stakeholders of the economy but challenges remain with its implementation. The Businesses need to redesign their labelling, packaging, pricing which involve costs. They need to update their accounting tools. The Government shall also be ready with necessary changes in compliances so that implementation becomes smooth. At the same time the Government also needs to be vigilant enough to ensure that transmission of these reductions shall pass on by the corporates to the end consumers in the form of reduction in prices.
Ways Forward: Although it seems that GST 2.O reforms are merely rate cuts but it’s only a narrow view. One need to understand the consequences of these cuts will influence consumption pattern, production pattern, bringing structural changes in the economy. It will influence consumers, producers, governments and its institutions. Hence there are not merely the rate cuts. This will definitely be going to impact over household savings. Further there is a need for bringing petroleum products and alcohol also under GST regime which will further simplified the taxation system. The GST reforms 2.0 also shown us the spirit of cooperative federalism which if works in favour of land reforms and labour reforms can be game changer in ease of doing business fueling investment in the country.
References
- https://www.pib.gov.in/PressNoteDetails.aspx?id=155151&NoteId=155151&ModuleId=3
- Economic Survey GOI, 2023-24.