India’s Goods and Services Tax (GST) underwent a major reform effective September 22, 2025. The overhaul, termed GST 2.0, rationalised tax slabs and rates across multiple sectors. This step aims to simplify compliance, correct inverted duty structures, and boost household consumption by lowering tax burdens on many goods and services.
Background of GST Reforms
GST was introduced in July 2017 to unify numerous indirect taxes. Since then, multiple rate adjustments occurred. The latest reform reduces the number of slabs from four to primarily two—5% as a merit rate and 18% as a standard rate—plus a 40% demerit rate for sin goods. This rationalisation addresses classification disputes and aims to ease business operations.
Key Changes in GST Rates
The new rates include 0.25% for rough diamonds, 1.5% for polished diamonds, and 3% for precious metals. Five per cent applies to over 500 goods, including food items, medical devices, and agricultural machinery. The 18% slab covers industrial and consumer goods like machines, automobiles, and chemicals. A 40% rate targets sin goods such as tobacco and pan masala. The 12% slab remains only for bricks, with special input tax credit provisions.
Impact on Services Sector
Services like health and life insurance continue to be exempt. Hotels with tariffs up to Rs 7,500 now attract 5% GST, down from 12%. Beauty and wellness services, including salons and spas, saw rates reduced from 18% to 5%. These cuts aim to increase affordability and stimulate demand in these sectors.
Addressing Inverted Duty Structure
The inverted duty structure (IDS) occurs when inputs carry higher tax rates than outputs, causing cash flow issues for businesses. GST 2.0 reduces IDS by aligning similar goods under the same rate slabs. However, some sectors such as bicycles, fertilisers, and textiles still face IDS challenges due to differing input and output rates. The government plans further corrections based on ongoing industry feedback.
Compliance and Process Improvements
GST 2.0 also focuses on streamlining registration, returns, and refunds. Processes will become more technology-driven and time-bound, benefiting small businesses and startups. Pre-filled returns will reduce errors. Refunds, especially for exporters and IDS cases, will be automated and faster. Amendments to the CGST Act allow provisional refunds of 90% of claimed amounts to ease working capital constraints.
Consumer Benefits and Monitoring
The government expects GST rate cuts to lower prices and enhance disposable incomes. Companies have already announced discounts and offers. The Finance Ministry will monitor price changes monthly for six months to ensure benefits reach consumers. This includes tracking over 50 categories from food to personal care and educational items.
Sectoral Highlights
Manmade textiles saw tax cuts with fibre and yarn rates lowered to 5%. Agricultural machinery and hydrogen fuel cell vehicles also benefit from reduced rates. Some industrial inputs like kraft paper saw rate increases, prompting concerns from packaging manufacturers. The government remains engaged with industry groups to resolve such issues.
Outlook for GST 2.0
GST 2.0 marks step in simplifying India’s indirect tax system. By rationalising rates and addressing structural issues, it aims to boost consumption and ease business operations. Further reforms on compliance and rate structure are expected as the government continues to refine the GST framework.
Questions for UPSC:
- Critically discuss the impact of Goods and Services Tax (GST) on India’s federal fiscal structure and inter-state trade.
- Examine the concept of inverted duty structure in indirect taxation. How does it affect business cash flows and government revenue?
- Analyse the role of technology in improving tax administration and compliance in India. Estimate its impact on ease of doing business.
- Point out the challenges and opportunities in rationalising tax rates in a diverse economy like India. How can tax reforms influence consumer behaviour and economic growth?
