The Government of India introduced major reforms in the Goods and Services Tax (GST) system in 2025. Announced on Independence Day, these reforms aim to simplify the tax structure and boost the economy. The GST Council approved the GST Reforms Bill in September 2025, marking shift in indirect taxation.
Overview of GST 2.0
GST 2.0 reduces tax slabs from four to two. The previous slabs of 5%, 12%, 18%, and 28% were merged into 5% and 18%. A few goods remain under special rates. This two-slab system replaces the earlier five-slab model that included a zero rate. The change took effect from 22 September 2025.
Impact on Goods and Services
About 20% of goods in the 12% slab, including packaged foods, beverages, textiles, and hotel services, were shifted to 5% or 18%. This will lower prices for many consumer goods. Reduced tax rates are expected to increase demand and consumption. Essential and non-durable goods will become more affordable, boosting purchasing power.
Effect on Micro, Small and Medium Enterprises (MSMEs)
GST 2.0 simplifies tax compliance for MSMEs. The revised input tax credit system and fewer disputes will improve cash flow. Lower business costs and easier tax processes will enhance competitiveness. This will help MSMEs grow and create jobs, supporting economic expansion.
Economic Growth and Inflation
The reforms aim to stimulate consumption, investment, and employment. The government expects GDP growth to rise by 0.6 to 0.7%. Lower inflation, aided by favourable monsoon and food prices, supports this outlook. The Consumer Price Index inflation rate is at its lowest in eight years, reflecting stability.
Global Investment and Credit Ratings
Recently, S&P Global Ratings upgraded India to BBB investment grade for the first time in 18 years. This rating signals economic and political stability. It shows India can meet its financial obligations but faces some risks. Higher ratings like A or AA indicate greater reliability. India’s upgrade improves foreign investor confidence and access to cheaper credit.
Comparative International Ratings
India’s BBB rating is below China’s A+ and the US’s AA+. Pakistan holds a lower B- rating, considered speculative. Ratings affect investor decisions and borrowing costs. India’s upgrade marks progress but marks the need for continued reforms to reach higher stability levels.
Long-Term Benefits of GST 2.0
Simplified tax rates will boost domestic demand and industrial growth. The reforms support the government’s goal of making India a global manufacturing hub. Enhanced ease of doing business and technological improvements in tax processes will attract investment. This pro-growth tax structure balances affordability, growth, and revenue.
Questions for UPSC:
- Taking the example of GST 2.0 reforms, discuss how tax simplification can promote economic growth and ease of doing business in developing countries.
- Examine the role of credit rating agencies like Standard and Poor’s in influencing foreign investment and economic stability. Discuss in the light of India’s recent BBB upgrade.
- Analyse the impact of indirect tax reforms on the Micro, Small and Medium Enterprises (MSME) sector and employment generation in India.
- Critically discuss the challenges and opportunities faced by emerging economies in balancing inflation control and GDP growth, with suitable examples.
