India Unveils GST 2.0: Growth Push vs. Revenue Risks

Source Credit : Portfolio Prints

A Bold Move Toward Simplification and Stimulus

In early September 2025, India's GST Council approved a sweeping revision of the Goods and Services Tax—now dubbed GST 2.0—a bold initiative aimed at simplifying the nation's indirect tax structure and stimulating economic growth ahead of the festive season.

• The complex four-slab system has been streamlined to just two primary tax rates: 5% and 18%. In addition, a 40% slab has been introduced for luxury and “sin” goods.


• The new framework takes effect from September 22, coinciding with the start of Navaratri, aiming to provide a timely “Diwali boost”.

Key Coverage and Consumer Benefits

GST 2.0 eases the tax burden across multiple sectors:

• Healthcare: Thirty-three life-saving drugs, primarily for cancer and chronic diseases, are now GST-exempt. General medicines and medical devices see their rates drop from 12% to 5%.


• Insurance: Health and life insurance premiums are now tax-free, aligning with government goals such as “Insurance for All by 2047”


• Everyday Goods: Staple foods, FMCG items, textiles, footwear, and packaged goods have tax rates massively reduced to either 5% or zero


• Automobiles & Appliances: Small cars, motorcycles under 350 cc, TVs, ACs, and other durables move to the 18% slab, down from 28%


• Construction Materials: Cement and steel for home buying and building are taxed more lightly, lowering real estate costs and energizing demand


• Textiles & MMF: The man-made fiber and sub-₹2,500 retail segments stand to benefit from lower rates, aiding MSMEs and exporters

These changes are poised to uplift household affordability, ease compliance, and spur inclusive consumption.

Economic Rationale: Stimulating Growth at What Cost?

Authorities and industry leaders view GST 2.0 as a strategic lever:

• More money in consumers’ pockets: Lower prices on essentials should boost demand and consumption—a much-needed growth engine amid global uncertainties


• Supporting "Make in India": Input cost reductions and simplification help manufacturing and domestic production


• Formalization & ease of doing business: Simplified rates may reduce classification disputes and compliance burdens, especially for small firms

Political leaders echo this optimism:

• Prime Minister Narendra Modi called GST 2.0 a “double dose of support and growth,” aimed at boosting economic resilience and self-reliance in the 21st century.


• Industry leaders from FICCI, CII, and notable corporates like Mahindra and Godrej welcomed the reforms, citing boosted demand, improved compliance, and export competitiveness.

Revenue Risks and Federal Tensions

But the reforms come at a fiscal cost:

• The anticipated revenue loss is estimated at ₹48,000 crore (around $5–5.6 billion)


• While the central government deems this sustainable in view of consumption-led gains, critics—including the opposition Congress—have raised concerns. They demand that states be compensated for their revenue shortfalls, a commitment that’s still unclear


• Financial analysts suggest states' share of GST (~70%) could help them, though the central burden will still be substantial


• Market response was initially positive, though analysts caution that implementation clarity and guidance are essential to prevent confusion and errors during the transition

Balancing Act: Growth or Fiscal Strain?

GST 2.0 embodies a delicate balance:

• Upside: A simplified tax regime, lower prices on essentials, structural support for industries, and a timely boost to morale and consumption.


• Downside: A sizable fiscal hit that may challenge the central and state budgets, with long-term sustainability hinging on consumption-driven growth delivering enough additional revenue to offset these losses.

Looking Ahead: Implementation and Watchpoints

Key areas to monitor:

• Smooth rollout from September 22: Adequate IT upgrades, clear classification guidance, and taxpayer education are critical


• Fiscal outcomes: Will improved consumption revenue help recoup the loss? Or will the revenue gap pressure finances?


• State responses: Will compensation be negotiated? How will expenditures and fiscal autonomy play out?


• Consumer impact: Will domestic demand—and particularly festive season spending—see a meaningful surge?

Summary

GST 2.0 is an ambitious, growth-oriented reform—streamlining tax slabs, cutting rates across the board, and poised to rejuvenate demand. But its success depends on effective implementation and whether the consumption uptick can indeed bridge the ₹48,000 crore revenue chasm.