Introduction
Have you ever wondered how a single tax reform could impact every purchase you make—from your daily groceries to luxury cars?
The Goods and Services Tax (GST) came into action in India in 2017 with the goal of bringing the country’s indirect tax system under one umbrella. In doing so, GST replaced various state and central taxes and aimed to clear up compliance, minimize tax cascading, and enhance revenue for governments.
One the whole, GST has delivered on its promise; nonetheless, challenges arose in the following aspects:
- Multiple tax slabs, generating confusion and disputes over classification.
- Compliance was costly and exhausting for businesses because of complexity.
- Input Tax Credit (ITC) abuse diverted revenue collections.
To clear up above issues, the Indian government launched GST 2.0. According to the recommendations of the GST Council, on goods and services with this will not include the cigarette, chewing tobacco products like zarda, unmanufactured tobacco and beedi will come into effect from September 22, 2025.
There will be no changes to the current rates of GST and compensation cess, on specified goods, namely cigarettes, chewing tobacco products like zarda, unmanufactured tobacco and beedi, until the rate change will come into effect and will be notified later, subject to discharging all loans and interest liabilities with regard to compensation cess.
Key Features of GST 2.0
1. Restructured Tax Slabs
The previous four tax slabs (5%, 12%, 18%, 28%) have been directly consolidated:
- 5% for essential goods & services
- 18% for mid-tier goods
- 40% for sins and luxury goods (including tobacco, alcohol, and luxury automobiles)
This is intended to alleviate any confusion for businesses and to collect and remit tax fairly on behalf of the buying public.
2. Greater Digitalisation and Already-Better Compliance
GST 2.0 features digitalisation improvements that allow for:
- Automated filing systems, making remittance easier
- Better turnaround for refunds for businesses, particularly SMEs
- Less paperwork that allows businesses to focus on growth rather than tax minutiae
3. Input Tax Credits (ITC)
- ITC issues you could hope to see noticed are new rules to limit the ability to misuse ITC and measure removing fraud.
- This means more accountability by removing a certain amount of fraud from a systemic standpoint.
GST Rate Changes by Sector (2025)
GST Reductions – Boosting Affordability
| Sector/Product | Old GST Rate | New GST Rate | % Change | Example |
| FMCG Essentials | 12% | 5% | -7% | Pulses, packed flour, cooking oil |
| Dairy Products | 12% | 5% | -7% | Milk, curd, paneer |
| Pharmaceuticals | 12% | 5% | -7% | Essential medicines, vaccines |
| Passenger Vehicles < 350cc | 18% | 12% | -6% | Scooters, small motorcycles |
| Basic Food Items | 5% | 0% | -5% | Rice, wheat, sugar |
Impact: Consumers can enjoy lower prices on staple products while SMEs can enjoy a lower cost for production thus allowing them to improve their competitiveness.
Example: FMCG conglomerate – Britannia Industries – noted that the reduction in GST on staples like flour and biscuits would stimulate consumption in semi-urban and rural markets.
GST Increases – Revenue Generation and Rational Consumption
| Sector/Product | Old GST Rate | NewGST Rate | % Change | Example |
| Automobiles above > 350cc | 28% | 40% | +12% | Luxury bikes, SUVs |
| Luxury Products | 28% | 40% | +12% | High-end watches, imported goods |
| Cosmetics & Perfumes | 18% | 22% | +4% | Premium skincare, makeup |
| Electronics | 18% | 20% | +2% | Smartphones, laptops, TVs |
| Tobacco & Alcohol | 28% | 40% | +12% | Cigarettes, alcoholic beverages |
Impact
- It promotes conscious consumption of luxury and sin goods.
- Generation of more tax revenue for public interest programs and infrastructure projects.
Example: Luxury vehicle sales, such as Mercedes-Benz and BMW, in India will see a temporary stall with the inflated GST, but sales should normalize within urban high-income segments.
Sector-wise Impact Analysis: GST 2.0
1. FMCG & Retail
- Lower GST rates on essentials reduces cost pressure for retailers.
- Assists companies in driving penetration in smaller Tier 2 and Tier 3 cities.
2. Automotive Sector
- Small vehicles (<350cc): Benefited from reduced GST on fuel, enhancing rural and urban mobility purposes.
- Luxury vehicles (>350cc): Higher GST on fuel may hinder some premium vehicle sales temporarily.
3. Pharmaceuticals & Healthcare
- Items on the essential medicines list now only attract a 5% rate, helping with the affordability of healthcare.
- More cash flow for pharmaceutical manufacturers as ITC refunds will be quicker.
4. Electronics & Lifestyle Products
Slight increase (2 – 4%) in GST will probably have negligible effect on sales, however, urban consumers may start noticing the higher costs of smartphones, laptops and cosmetics.
Economic Impact
- Revenue: GST 2.0 could see a ₹48,000 crores loss per annum in revenues which will be offset through increased consumption and better compliance.
- Inflation: Analysts expect a decline in inflation of 1.0-1.1 percentage points, which will boost consumption confidence.
- Economic Growth: By promoting better compliance through simplified taxes, and reducing the costs of law compliance for businesses, there will be better efficiency that could support initiatives such as Make in India 2.0.
- Formalization: Better digital compliance will also entice small businesses to switch to the formal economy, subsequently broadening the overall tax base.
The EY India report says it will particularly benefit small and medium enterprises (SMEs) with the simplified slabs and rules on Input Tax Credit (ITC). This will lead to higher employment and productivity in the medium term.
Challenges & Criticisms
- Directions for Change: Businesses will have to upgrade accounting systems and retrain employees.
- Industry Level Resistance: Luxury, tobacco, and alcohol industries may resist a higher rate.
- Consumer Challenges: It will be important to ensure benefits of reduced GST are passed to the end consumer
- Risk of Implementation: Removing the anti-profiteering mechanism, there may be a loophole to overcharge.
GST 2.0 in the Macro Context
- Global Benchmarking: India’s GST 2.0 wants to simplify tax structures like Australia and Canada in order to make India a more attractive base for foreign investors.
- Digital India alignment: GST 2.0 supports digital invoicing and e-filing which will reduce the impact of human error and fraud.
- Consumer Policy Drive: Attention to what is affordable for people based on their consumption of necessities means that the purchasing power of middle-class households will go up.
When all is said and done: A step towards modernizing our tax system
GST 2.0 is not only a tax reform, but a multi-faceted strategic step with objectives around:
- Simplified taxation and less bureaucratic overhead
- Economic obtuse-ness
- Consumer confidence and spending
- Creating a more formalized and digitized economy
If GST 2.0 is out and about in the work place and people begin to buy into it then it could proof to be an example for others who are developing economies. The outcomes involved efficiency, equity and income.
