GST 2.0 will boost economic activity

Pramod Das

MBA (DU), PGDIF (GU)

Goods and Services Tax (GST) was implemented on 1st July 2017 by replacing the multiple-tax regime with a unified system which lowered taxes on essentials by removing the cascading effect and created a more rational framework. With GST 2.0, which comes into effect on September 22, India has taken a big step towards an inclusive Atmanirbhar Bharat.

Let’s see the need for GST 2.0. When it was introduced in 2017, GST carried a four-slab design (5 per cent, 12 per cent, 18 per cent, 28 per cent); hence, it was criticized for its multiple tax slabs and high rates on essential goods and complex compliance.

Moreover, states expressed frustration over the loss of their independent taxing powers and delays in revenue compensation payments from the central government. Critics argued that high GST rates were applied to essential items like food, school supplies, and medical care, placing a burden on the poor. 

The complexity of the GST system led to high compliance costs, and micro, small and medium enterprises (MSMEs) faced challenges in adapting to the new procedures. Some pointed out that the tax’s design, with high rates on mass consumption items, was regressive, impacting the poor more heavily as a proportion of their income.

The opposition also called it a “Gabbar Singh Tax”, comparing it to a robber extorting money from the poor. Hence, the need for reform was felt, and the government finally has launched GST 2.0. The core objectives of GST 2.0 are simplification of tax slabs, better digital integration and addressing compliance challenges.

What has changed? Tax rates were cut or eliminated on hundreds of items, including daily essentials, which directly increases household savings and disposable income. Items such as paneer, UHT milk, and Indian breads are now tax-free. Many packaged foods like butter, ghee, ice cream, and biscuits now have a 5% tax instead of 12% or 18%.

A wide range of personal care items, including soaps, toothpaste, and hair oil, were moved to the 5% slab from 18%. Many life-saving drugs are now tax-free, and most other medicines, diagnostic kits, and medical equipment have been reduced to a 5% GST.

Let’s have a look at the key features of GST 2.0 impacting economic activities. GST 2.0 is a two-rate system, i.e., 5% and 18% for most goods and services, with exemptions for essentials and a 40% “demerit rate” for luxury and sin goods. Lower input costs on items like cement and auto parts enhance the competitiveness and profitability of MSMEs. Higher rates on products like tobacco and aerated drinks serve dual purposes – discouraging consumption and generating revenue from inelastic demand products. Consumers benefit from lower prices on daily essentials, some consumer durables, and even insurance premiums due to reduced or eliminated taxes. Cheaper goods and services increase household savings and disposable income, leading to higher consumer spending.

Reduced tax rates on inputs and lower compliance costs improve the cash flow and profitability of businesses. These features lower prices, stimulate demand, reduce disputes, and encourage the formalisation of the economy, ultimately boosting economic activity and growth.

As per SBI Research, the key projections of the GST reforms indicate an initial direct consumption boost of Rs 70,000 crore, derived from Rs 85,000 crore GST foregone, assuming a marginal propensity to consume of 0.7. The total additional aggregate demand is projected to reach Rs 1.98 lakh crore due to the multiplier effect as new spending circulates through the economy.

GST 2.0 significantly impacts the Indian stock market; sector-specific movements are likely to be seen rather than a uniform market-wide rally. Certain sectors are anticipated to benefit from GST 2.0, potentially leading to positive stock market reactions. These include Fast-Moving Consumer Goods (FMCG), electronics, the automobile sector, cement, etc. Potential challenges like short-term market volatility can take place due to implementation issues.

GST 2.0 will enhance ease of doing business. Exporters and businesses with an inverted duty structure (IDS) will benefit from a faster refund process, receiving 90% of their refund claims provisionally within seven days based on risk assessment. This helps improve liquidity and cash flow, particularly for MSMEs. Moreover, low-risk applicants with a monthly GST liability up to Rs. 2.5 lakh will get automated registration within three working days, covering nearly 96% of new applicants from November 1, 2025. Measures like mandatory e-invoicing for businesses with over Rs. 5 crore turnovers and automated reconciliation of invoices are expected to reduce errors and facilitate accurate filings. A simplified structure with clear rules and faster dispute resolution, including the establishment of the GST Appellate Tribunal (GSTAT) by September 2025, is expected to minimise conflicts between taxpayers and authorities. Lower GST rates on key inputs strengthen domestic manufacturing and support the government’s “Make in India” and “Aatmanirbhar Bharat” initiatives.

Despite significant benefits like simplification and increased consumption, India’s GST 2.0 also presents several negative aspects and challenges. The reforms are estimated to cause a significant annual revenue loss of around Rs. 48,000 crore, primarily due to the reduction or zero-rating of tax rates for numerous goods. This revenue loss puts fiscal pressure on both the central and state governments, potentially forcing expenditure cuts or increased borrowing. States heavily reliant on GST revenue transfers might curtail spending on welfare and infrastructure, potentially slowing growth. The end of GST compensation cess for states also adds to this fiscal tension. Critics argue that relying heavily on indirect taxes like GST, even with rate rationalisation, places a disproportionately higher burden on lower- and middle-income households who consume a larger share of their income, compared to direct taxes borne by higher-income earners. The system may simplify but not necessarily equalise.

In addition to that, petroleum and alcohol remain outside the GST framework, leading to a cascading tax effect and limiting the overall efficiency gains of the unified system.

GST 2.0 is not just a tax reform; it is a tool to stimulate economic activities, investment, and consumer spending. Its success depends on smooth implementation, cooperative federalism and awareness among businesses.

With GST 2.0, India has the opportunity to streamline taxation, encourage economic formalisation, and accelerate growth across sectors.