Since its rollout in 2017, the Goods and Services Tax (GST) has transformed indirect taxation in India by unifying a fragmented system of state and central levies. Over time, however, businesses and policymakers have pointed to areas where the framework could be simpler and more predictable. As the government prepares to introduce “GST 2.0”, the focus is not on replacing the current system but on refining it — simplifying rates, improving compliance, and addressing structural inefficiencies.
Announcing the reform in his Independence Day address, Prime Minister Narendra Modi set the tone:
“The government will bring Next Generation GST reforms, which will bring down the tax burden on the common man. It will be a Diwali gift for you.”
— PM Narendra Modi, 15 August 2025
In subsequent remarks, Modi described the rollout as a “GST Bachat Utsav”, stressing that GST 2.0 is designed to bring relief across society — from households and farmers to women, youth, MSMEs, and traders. By linking the reform to the festive season, the government underscored its intent to pass visible savings directly to consumers.
This positions GST 2.0 as not just a fiscal adjustment, but one of the most significant socio-economic policy moves of the decade.
Rationalising the Rate Structure
One of the most anticipated GST reforms in 2.0 model is the rationalisation of GST slabs. At present, GST operates with four main rates: 5%, 12%, 18%, and 28%, along with cess on certain goods. This structure, while comprehensive, has often created disputes around classification. Businesses have struggled with the ambiguity of whether a product attracts 12% or 18%, leading to compliance challenges and litigation.
GST 2.0 proposes to simplify this by collapsing the structure into two core slabs: 5% and 18%. A separate 40% rate would apply to luxury and sin goods such as tobacco and high-end vehicles. This model brings India closer to the internationally prevalent “standard rate + reduced rate + sin tax” format followed in many VAT and GST jurisdictions.
As Modi reminded, India’s earlier tax maze often made it cheaper to send goods via Europe than across Indian states. A leaner slab design is intended to end such distortions.
With fewer slabs, the scope for misinterpretation reduces, compliance becomes easier, and revenue administration becomes more transparent.
Addressing Inverted Duty Structures
Inverted duty structure is another structural challenge where tax rate on inputs are higher than final products. Industries such as textiles and fertilizers have faced working capital pressures due to delayed refunds of unutilised input tax credit. GST 2.0 aims to address these anomalies by reassigning certain goods into lower slabs, thereby easing the credit flow and reducing refund backlogs.
This adjustment could have a direct positive effect on liquidity, particularly for MSMEs that operate with tighter cash cycles.
Compliance Simplification Measures
Alongside rate rationalisation, GST 2.0 also aims to make compliance more efficient. Current proposals in discussions include:
- Faster registration: with a target of clearing 95% of applications within three days using risk-based profiling.
- Pre-filled returns: reducing manual errors and mismatches in filing.
- Quicker refunds: particularly for exporters and businesses with accumulated credits.
These initiatives point to a shift from a reporting-heavy environment towards a trust-based model, where technology and data analytics drive compliance instead of extensive manual intervention.
Sector-Specific Relief
Early discussions highlight that certain sectors may benefit from targeted relief:
- Insurance premiums (life and health) could see GST reduced to 5% or even nil, supporting social security priorities.
- Agricultural inputs and equipment may shift to 5%, boosting rural demand.
- Small cars could move from 28% to 18%, while everyday essentials like food, textiles, cement, and salon services may also benefit from a lower rate.
Such adjustments are designed not only to ease household expenditure but also to power growth in industries linked to mass consumption. As Modi framed it, these are savings that flow “directly into the pockets of the poor and middle class.
Revenue and Fiscal Considerations
Inevitably, reduced rates will translate into lower collections in the short term. Estimates suggest a possible annual revenue loss of around ₹85,000 crore. However, the government is relying on increased consumption to balance this out. With more affordable goods and services, household spending is expected to rise, providing a stimulus effect on the economy.
According to Modi, when combined with recent income-tax cuts, GST 2.0 could unlock nearly ₹2.5 lakh crore of annual savings — a scale positioned as a national-level “Diwali gift” for households and enterprises alike.
The ongoing GST Compensation Cess (till March 2026) is also expected to act as a buffer during the transition phase, cushioning both the Centre and States from fiscal shocks.
Institutional Shifts After GST 2.0
The timing of GST 2.0 coincides with the conclusion of the anti-profiteering framework, which earlier mandated businesses to pass on tax savings to consumers. Moving forward, pricing adjustments are expected to be market-driven, with lighter oversight mechanisms replacing prescriptive penalties.
The GST Council remains central to these changes, with the upcoming meeting on 3–4 September 2025 set to finalise the proposals.
Looking Ahead- The Impact of GST 2.0
Taken together, GST 2.0 signals a maturing of India’s indirect tax system. The first phase of GST was about integration — bringing together multiple taxes into a unified framework. The second phase appears focused on refinement — simplifying rates, easing compliance, and addressing inefficiencies.
For businesses, this means preparing for revised tax rates, aligning ERP and billing systems, recalibrating working capital planning, and communicating price adjustments to consumers transparently. For policymakers, it is about balancing revenue needs with the broader economic objective of stimulating demand.
As Modi framed it, GST 2.0 is not just a tax adjustment but a building block in the vision of “Viksit Bharat 2047” — a tax system that is globally competitive, locally empowering, and firmly aligned with India’s growth story.
