GST 2.0 is a robust step towards development, but needs a pragmatic approach

The introduction of GST 2.0 represents a significant evolution in the taxation framework, aiming to define a shift towards a more streamlined and efficient indirect tax system. GST 2.0 aims to address some key longstanding issues in the GST framework, with a focus on simplifying the tax slabs.

While rate rationalisation has been gathering steam for a couple of years, the new rate slabs aim to reduce complexity, ease classification issues, and give some much-needed comfort to the Indian middle class. Other reforms include some important steps to foster ease of doing business and efforts to give Indian companies a competitive edge in the global market.

The rationalisation of tax slabs from the previous multi-tier structure to a more simplified two-tier structure is a step in the right direction, albeit much delayed. After almost eight years of GST, a certain amount of frustration was creeping into the ecosystem with respect to classification and rates.

The Indian population was also growing fickle with increasing daily costs of essential household items. The new structure, where there is a merit rate of 5% for essential goods and a standard rate for most other items, is welcome. This is propped up on either side by the exemption given to food items, milk, medicines, etc., and on the other side by the sin tax of 40% on frowned-upon activities like cigarettes, online gaming, etc.

The middle rate of 18% is a load balancer—aspirational goods like air conditioners, small to medium cars, and other infrastructural and novelty items have been placed in this slab to complete the picture of a simplified tax structure. The lower rate also has the potential to directly lower production costs and bring down and simplify end-consumer prices.

The rate rationalisation, therefore, makes the GST framework—at least now at the skeletal level—look more scientific and easier to administer, and hopefully free from needless classification and other niggling disputes that were souring the industry mindset. The lower tax rates on inputs and outputs will enable businesses to pass savings to consumers, stimulating demand, and efficient compliance can lead to faster scaling up.

On the services side, a key development has been the abolition of GST on individual life and health insurance. While this brings down the overall cost for the individual customer, insurers face a double-edged sword. On one hand, there is an expectation that the market value and intake of insurance products will see an uptick in demand; on the other hand, the restriction on input credit (due to the exemption) leaves the door open to insurers to recover some of the tax hit by increasing basic premiums. This is a decision that insurance companies need to carefully calculate to not alienate the market when the iron is seemingly hot.

On the compliance front, there has been an introduction of faster and predictable refund processes, measures to ease the inverted duty structure burden, self-assessment, and digital-first mechanisms like data sharing on a digital platform, automated return population, invoicing, and easy tracking of input credits and other compliance.

These measures aim to reduce paperwork and needless official intervention. The changes may especially help small and medium enterprises to focus more on the business side rather than overburdening tax compliance, corruption risks, undue official intervention, and other compliance navigation. These can also free up working capital and ease cash flow management.

From an analytical perspective, the new GST 2.0 structure would possibly seek to strengthen India’s business outlook and bring forth a more agile, investor-friendly tax ecosystem. The reforms seek to put in place a friendlier playing field, for example, the change in place of supply rules for intermediaries—where the place of supply for such services is now in the hands of the recipient—has a huge potential to end a lot of prevailing tax disputes.

In a world where India is seeing a considerable uptick in investment into back offices and GCCs, the supplies made by these companies from India to their overseas parent/group companies (even if they are intermediary services) will all be treated as exports. This will open up the field of unchallenged export benefits for these companies, like export refunds for unutilised input tax credit, improving and forecasting expansion, growth in business, and enhancing global competitiveness. This also gives a big boost to investor confidence globally, where the investor may be assured of a more practical return on investment in Indian companies, at least from an export of services perspective.

There are, of course, challenges. Key among them is the handling of stale input credit that has to be reversed because of the exempted GST on output goods. Other factors include optimised utilisation of credit in the books before the tax rate falls from a higher rate.

There are questions around anti-profiteering, where the government must ensure that the businesses actually pass on the benefit of the lower tax rates to the ultimate customer, especially since the anti-profiteering mechanism’s sunset clause has come into effect. The industry has to strategize well if it wants a proper buy-in on the benefits being offered to them, else the business could end up being burdened by rising tax costs.

The operation of the Goods and Services Tax Appellate Tribunal in an efficient, productive way is also key. The GSTAT is long delayed, and any stutter in its operations will seriously endanger business confidence.

GST 2.0 is long delayed, and the government has to be pragmatic and not deal with GST like a mere tax collection tool. Reforms have to be scientific and well thought out from a practical perspective. Reactionary measures in the garb of tax simplification will not build operational efficiency in the market, and the government must keep ahead on this principle.

The need of the hour is educated enabling mechanisms—catalysts that focus on innovation, expansion, and unlocking growth opportunities. Ultimately, the goal should be to strengthen investor confidence and hopefully position India as a competitive economic powerhouse, driving sustainable development in the years to come.

Bose is Partner, Shardul Amarchand Mangaldas and Co; Chakrabarti is Consultant, Shardul Amarchand Mangaldas and Co. Views are personal.