GST 2.0: Significant Progress, Yet Room for More Reforms To Achieve 'One Nation, One Tax'

When the Prime Minister announced on the Independence Day that middle class of India is about to receive a Diwali Bonanza in terms of reduced GST rates, it was a moment that entire India waited for. The stock market responded positively to the announcement of GST 2.0 by Finance Minister Nirmala Sitharaman made a few days back. The 2025 GST reforms appear positive, especially for businesses, consumers and economic growth.

The outdated four-tier system (5 per cent, 12 per cent, 18 per cent, 28 per cent) has been replaced with a cleaner structure of 5 per cent (on essential items), 18 per cent (on the majority of goods and services) and 40 per cent (on luxury and sin items). The simplification of slabs has brought some clarity into the tax system. We started with GST in 2017 as a means to replace the complex web of central and state-level indirect taxes, and the efforts of the government to reform the tax structure continue. Though the goal of 'One Nation, One Tax' is yet to be achieved, but we are gradually moving towards it.

GST 2.0 has managed to reduce the confusion and ease compliance. It will hopefully minimise the classification disputes. A wide range of daily-use goods and services are cheaper now, and some are tax-free too. Bringing the rate down to zero per cent on life-saving drugs, education supplies, food staples like rotis and parathas, life and health insurance premiums, and some other important items is a welcome move. It fulfils a long-standing industry demand. Items like biscuits, soaps, cakes, sauces, butter, and many other household items saw a reduction in rates to 5 per cent. This would definitely reduce household expenditure and help the middle class survive. Sin goods face a steep rate of 40 per cent, aligning well with goals to discourage harmful consumption.

Analysts strongly feel that these reforms will lower inflation and boost GDP growth. However, a question that many people are asking is whether the tax cut will be passed on to consumers. With lower GST rates, the companies have an option to reduce retail prices.  Considering the competition pressure in the FMCG, healthcare and auto sectors, it makes sense for businesses to pass on the benefit to customers. Of course, they may not pass the whole benefit, but passing on a part of it will serve them well. However, some government monitoring may be required to ensure businesses reduce prices in line with the tax cuts.

Another question being asked is - will GST 2.0 help India counter the US tariff hike? In my opinion, not in a direct way, but yes, it will help India grow stronger and face unfavourable trade tariffs of any country, for that matter. These reforms will boost our domestic consumption, which will help in GDP growth. There will be more disposable income in the hands of consumers that will neutralise the inflationary pressures. Export-heavy sectors like pharma, gems, and textiles may not see direct benefit. However, stronger domestic demand will bring some indirect relief. Most importantly, the reforms have already sent a strong signal of India's resilience to the world.    

However, there has been some disappointment, too, regarding these reforms. Many packaged foods, such as chips or cereals, remained at the same rates and did not find a place in the reduction schedules. The relief, while meaningful, was not universal across all food, electronics, or mobile devices segments. Another issue is the fuel. Although widely debated, petrol and diesel were not brought under GST. The focus of the reforms was mainly on household goods and services, and fuel continued under excise plus VAT, keeping both Centre and State revenues intact.

To derive the most from the reforms, it is crucial that all implementation hurdles are resolved by the government as soon as possible. While the reforms take effect from September 22, 2025, the success hinges on timely software upgrades, clear guidelines, and efficient execution. For businesses, a smooth rollout is essential to prevent disruptions. Also, the government has to balance between consumer relief and the revenue needs of the states. It would have been helpful if the tax rates were not reduced to zero but kept at a minimum of 5% and these funds through the states should have been passed to the municipal authorities which are struggling for funds as 'chungi' (octroi or entry tax on goods entering their jurisdiction), their main source of fund was abolished with the roll out of GST in 2017.  States' fiscal sustainability may be challenging without proper compensation or alternative revenue mechanisms.

In the end, I would like to state that everything that is good may not be perfect. There is a large scope for more reforms in GST, which is not only desirable but essential as well.

(The author is Dean Academics and Professor of Accounting & Finance, GD Goenka University.)

(Disclaimer: Views expressed are the author's own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.)