GST 2.0: The good and simple tax

WHEN PRIME MINISTER Narendra Modi assumed office for the third time in a row in June last year, he had two key reforms in mind, among others — an overhaul of the Income Tax Act, 1961, and simplification of the Goods and Services Tax (GST). Within 15 months, both were achieved. The Income Tax Bill, 2025, was approved in the monsoon session of Parliament, and a two-rate GST structure — a standard rate of 18% and a merit rate of 5%, along with a 40% slab for sin goods such as tobacco, paan masala and luxury cars — was rolled out on September 22. The erstwhile five-rate GST structure (0%, 5%, 12%, 18% and 28%), along with classification issues, had made the tax structure cumbersome, leading to disputes. Businesses had approached the government to simplify the structure as it caused hindrance in investment decisions, and the Prime Minister’s Office (PMO) had taken cognizance of the concerns. Finance minister Nirmala Sitharaman reminisces how Prime Minister Modi continuously prodded her over the past six months about the reforms needed in GST. “What are you doing about GST? PM Modi would ask me,” Sitharaman recalled. Within 37 days of his Independence Day address, in which PM Modi announced a Diwali bonanza for citizens, the government implemented the mega GST reforms — almost a month ahead of the festival of lights. The GST overhaul exercise was much beyond rate tinkering, wherein almost 400 items have been shifted to lower rates. Measures pertaining to ease of doing business — refunds within three days, faster registration, correction of the inverted duty structure (IDS) — have been taken. From November 1, the government is targeting to process about 90% of the provisional refunds within three days. The moves come as a major reprieve across sectors. Textiles and leather are particularly going to benefit from the correction of the inverted duty structure, and GST 2.0 is also likely to provide a major fillip to consumption. ‘Bachat Utsav’, says PM In his address to the nation on September 21 — a day ahead of the roll-out of the GST 2.0 reforms — PM Modi termed the savings due to income tax relief on annual income up to ₹12 lakh and the GST cut as a ₹2.5 lakh crore “Bachat Utsav”. “In this GST ‘Bachat Utsav’, your savings will increase, and you will be able to buy things of your choice more easily. Poor families, neo-middle class, farmers, women, traders, and entrepreneurs will benefit from the next generation of GST changes,” Modi had said. “This reform will accelerate India’s growth story, facilitate doing business and make investments more attractive. It will ensure that every state competes equally in the race for development.” In fact, after the new rates came into force, vehicle sales saw an uptick. During an event, Sitharaman said the consumption surge is evident from the buoyancy being witnessed in the auto sales market. There is no doubt that the GST reforms announced by the government will go a long way in altering the Indian economy structurally, and have a ripple impact on investment, consumption, overall economic growth, and the size of the economy. But then, GST is not the only reform on the government’s radar. The pipeline is long. The next big moves are likely to be on de-regulation, digitisation of land records, and indigenisation in line with the spirit of Atmanirbhar Bharat, especially in sunrise sectors such as semiconductors, electric vehicles, battery, and energy transition. The government has already set the ball rolling. GST fillip to investments Private investments have been one of the sticky points. Since the pandemic, the government has been doing the heavy lifting on capex spending, while the private sector has been desisting from loosening the purse strings. That said, the situation has somewhat improved now. “After years of being led primarily by the government, green shoots are visible in private investment, suggesting broader participation in capex formation. Gross fixed capital formation rose by a strong 9.4% in the fourth quarter [of FY25], up from an average of 6.2% in the last three quarters,” says to Deloitte’s ‘India Economic Outlook, August 2025’. So, will the private sector now have the requisite confidence to go all guns blazing on investments? Top government officials say GST simplification had been one of the key demands of companies wanting to invest. “At times, we received representations from investors wanting to set up industries. They pointed to the complexity in tax structure, and expressed concerns on likely disputes and uncertainties surrounding their investments. Hence, it was decided that there was an urgent need to restructure the GST,” says Sanjay Kumar Agarwal, chairman, Central Board of Indirect Taxes and Customs (CBIC). “The biggest expectation from GST is a simple tax. Multiple slabs add to complexity, disputes, and uncertainty. The fundamental principle of taxation is to provide certainty and stability to businesses. That has been achieved by reducing the number of rates. Items at a special rate are now clearly defined. There is no confusion regarding that. That is the fundamental difference that has come through these reforms. It will lead to better compliance and business certainty,” says Agarwal. According to Dinesh Kanabar, CEO of tax consultancy firm Dhruva Advisors, sometimes one needs a shock to galvanise into action and do things, which otherwise one would be hesitant to do. “I am hoping the shock that has come to us in the form of tariffs will galvanise us into action to ensure ease of doing business, which is the need of the hour. GST is one good response.” The sunrise sectors of the Indian economy such as energy transition and drones, among others, will benefit remarkably from GST reduction. GST on solar and wind devices has been reduced to 5% from 12%. Similarly, GST on drones, too, has come down to 5% from 12% and 18%. The reduction in GST on solar products will reduce the capital costs of solar panels, PV cells, wind turbines, and related devices, thereby enhancing the viability of solar and wind projects. On drones, along with the GST cut, classification issues have also been addressed. The reforms will end classification disputes and ensure policy certainty, boosting domestic drone manufacturing under ‘Make in India’. More reliefs, clarifications “While a lot has been spoken about rate rationalisation, some of the other changes have been more important. For example, for years we have been debating on the scope of intermediary services, or how discounts should be taken into account. Clarifications on some of those will spur investments and consumption, and ease tariff shocks,” adds Kanabar. In fact, clarity on the place of supply of intermediary services is what global capability centres (GCCs), information technology-enabled services (IT/ITES) and consulting firms in India have been looking forward to for some time now. The GST Council recommended omission of Clause (b) of Section 13(8) of the IGST Act, 2017. With this amendment, the place of supply for “intermediary services” will be determined according to the default provision under Section 13(2) of the IGST Act, 2017 i.e. the location of the recipient of such services. The move will facilitate exporters of such services to claim benefits. In another reprieve, the CBIC also clarified that post-sale discounts offered by manufacturers to dealers will not attract GST. A boost to consumption No wonder brands are passing on the benefits to consumers and bracing for a bumper Diwali. Automakers such as Tata Motors and Mahindra & Mahindra have taken the lead in announcing price cuts, followed by FMCG firms like ITC Ltd. “The reduction of taxes on essential and daily-use products will enhance disposable incomes for households and stimulate domestic demand. These reforms will significantly boost domestic manufacturing and demand for Indian-made products,” CII president Rajiv Memani said. The current, simplified GST rate structure is expected to generate a net gain to consumption of ₹70,000 crore to ₹1 lakh crore — amounting to 0.2-0.3% of GDP — from the second half of FY26, according to a note by the economics research department of the Bank of Baroda. Ratings agency Crisil says two-wheelers are likely to witness a demand hike of 200 basis points, and passenger vehicles 100 basis points, after the GST rate cut. “The GST Council’s decision to move to a two-rate structure of 5% and 18% is a timely move that will revive demand for automobiles,” Crisil said. GST reforms, undoubtedly, come as a mega reprieve for the economy. The Union government may be losing on revenues to the tune of ₹48,000 crore, but is taking a big bet on reinvigorating the economy via consumption boost and making Indian goods more competitive globally. The rate cuts also aim to enhance the tax base, eventually leading to larger formalisation of the economy and higher revenue growth. According to data from the Ministry of Finance, the GST taxpayer base more than doubled from 66.5 lakh in 2017 to 1.51 crore in 2025, while revenue registered a CAGR (compound annual growth rate) of 18% in the past four years to ₹22.08 lakh crore. One thing the Modi government did not want to do is a piecemeal attempt at reforms. The deft handling of GST 2.0 proves it. Fortune India is now on WhatsApp! Get the latest updates from the world of business and economy delivered straight to your phone. Subscribe now.

GST 2.0: The good and simple tax

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