Tax reform to growth engine: GST 2.0 set to power India’s economic take-off

Hailed as India’s most ambitious tax reform since Independence, the Goods and Services Tax (GST) regime has so far traversed a chequered path, garnered impressive collections and facilitated technological innovations. On India’s 79^th Independence Day, Hon’ble Prime Minister outlined his government’s vision for next-generation reforms to build an Atmanirbhar Bharat. The Government’s statement highlighted transformational reforms in GST anchored on three key pillars—structural reforms, rate rationalisation and ease of living.

These next-generation reforms aim to address long-standing industry concerns, including rationalising the GST rate, curbing classification disputes, addressing instances of duty inversion, streamlining the compensation cess framework, and enabling automated compliance.

With the Group of Minister’s (GoM’s) endorsement, the GST Council is set to deliberate on overhauling the GST rate structure, thereby replacing the current 5%, 12%, 18%, and 28% framework, with a simpler two-rate structure—5% for merit goods and 18% for standard items. Compensation cess, currently used for debt repayment, is set to merge with the GST rate, resulting in the creation of a 40% category for select sin and luxury goods. This monumental rate reform is timely and progressive, unlocking win-win outcomes for consumers, businesses and the Government alike.

Consumers stand to benefit from potential price reductions across diverse procurements and inevitably, fewer slabs leading to minimal classification disputes. With the spur in demand, businesses and the Government stand to experience stronger revenue inflow. A new 40% slab, with untied proceeds, will further strengthen the State’s revenue potential.

The success of the rationalisation efforts is premised on achieving intended objectives, foremost being tangible benefits to end consumers. The sweeping scope of the proposed rate changes has reignited anti-profiteering debates, especially in sectors likely to experience downward revisions. While the GST law already obliges suppliers to pass on the benefit of lower tax rates or input tax credits through commensurate price reductions, enforcement mechanisms for monitoring complaints have recently lapsed.

At this stage, a prudent wait-and-watch approach is worthwhile, giving industry time to recalibrate pricing, adjust supply chains, and align compliance practices within the existing framework. This period will also assess the industry’s agility to self-regulate and demonstrate responsible pricing behaviour. If these adjustments are inadequate, the Government could evaluate the option to reintroduce enforcement measures later to earmark profiteering.

 Another critical objective of GST rate rationalisation is to address duty inversions that lock up working capital and distort pricing decisions. The issue requires a two-pronged approach. Moderating GST rates on key raw materials for select sectors can help align input and output rates, reducing unnecessary credit build-up, which eventually passes on to the last-mile consumer.

As seen in the pharma sector, APIs are taxed at a higher rate (18%) while finished formulations largely fall under lower rates (12%/ 5%). With the revision of the 12% category, the credit built up will increase by 7% on several items that will get reclassified under a 5% slab. Hence, timely identification and moderation of input tax incidence for certain priority sectors can result in the realisation of the highest impact. Also, strengthening the inverted duty refund framework is the call of the moment.

Refund mechanism for ‘input’ credit-related accumulations due to duty inversions is generally perceived to be complex and time-consuming, which discourages sectoral players. Exclusion of “input services” and “capital goods” from the scope of inverted duty refunds, leave a significant portion of credit accumulation and a cascading effect, particularly for “make in India”. Hence, a mechanism for enabling comprehensive and swifter refunds covering the full spectrum of eligible credit is necessary for easing the working capital pressures. More importantly, this will ensure the revised reduced rates are completely passed on to the consumers. Summing up, fixing duty inversions is not just a tax tweak, it is pivotal for making GST 2.0 seamless, competitive, and future-ready.

 In continuation with the theme, it is necessary that export refunds under the LUT route be extended to include credit for capital goods. This reform can be introduced gradually, with refunds allowed proportionately over the useful life of the asset, in line with existing credit claim mechanisms. To complement these reforms, procedural improvements in case of other refund scenarios are equally critical.

A key step would be enabling the automatic refund of cash ledger balances, including TCS/ TDS refunds, based on simpler declarations, within a specified timeframe. TCS/TDS is collected and deposited, though any mismatch in the declaration of details between suppliers and recipients results in working capital blockage, even though the tax has already been remitted. Hence, enabling a swifter functionality in the GST portal, enabling time-bound refund, will not only cut down delays but also ease compliance and working capital pressures for businesses. 

Beyond refund, the next frontier for GST 2.0 lies in simplifying registration and compliance frameworks. With CBIC already issuing an instruction with a standardised checklist, the next step is for the GST Council to issue a circular and harmonise practices across States, embracing the realities of a digital-first economy. Recognising co-working spaces, fulfilment centres, and virtual offices as valid business premises will not only support MSMEs and start-ups but also bring innovative formats such as quick commerce and digital platforms within the GST framework.

Issuing a nationwide circular for registration with standardised documentation, ensuring hearings before suspension of registrations, and formally acknowledging flexible business models can infuse predictability and trust. Pre-filled GST returns leveraging e-invoicing data and ITC-matching can minimise errors, reduce disputes, and ease compliance. Together, these measures can minimise routine mismatch-related notices, easing bandwidth for businesses to focus on growth and build a technology-driven compliance ecosystem. 

GST 2.0 has the potential to evolve into a globally benchmarked indirect tax system delivering efficiency, equity, and competitiveness, while powering India’s economic aspirations. However, reforms of this magnitude extend far beyond rate changes as they necessitate a holistic re-engineering of classification systems, IT infrastructure, compliance frameworks, and pricing strategies, along with clearer refund mechanisms and calibrated anti-profiteering safeguards.

These complexities underscore the need for a phased and well-communicated transition plan, backed by robust stakeholder consultations, capacity-building initiatives, and adequate time for adaptation. Stakeholders remain confident that the Government’s commitment to aligning GST 2.0 with developmental goals and the ease of doing business will create a strong foundation for future economic growth.

Views expressed are personal. The article is authored by DP Nagendra Kumar, Senior Advisor, Deloitte India and Former Member GST, CBIC, Government of India, and Mahesh Jaising, Partner and National Indirect Tax leader, Deloitte India, with inputs from Apoorva Yadav, Director, Deloitte India.