GST 2.0 Reforms: From Unification To Simplification

On the morning of 3 September, there was palpable tension in the GST Council meeting. The Opposition pressed for a delay, citing the lack of consensus on compensation. However, the situation changed after a proposal was made for a public vote. Due to internal considerations, states like Kerala and Karnataka quickly came around, finally leading to GST 2.0 being passed.

This monumental feat was made possible by leaders such as Chhattisgarh’s Finance Minister O. P. Choudhary, who helped steer the Council towards consensus and reform.

This moment was not an isolated event but part of a much longer journey. The unification of several indirect taxes under a single framework in 2017 was a historic event, but there were issues that had to be addressed. In September 2021, under the direction of Finance Minister Nirmala Sitharaman, a Group of Ministers was established to resolve these issues and simplify the system, initiating the process of making GST more efficient.

To those who argue that GST reforms should have come earlier, it must be emphasised that 2018 to 2022 was simply not the right time for a reform of this scale. GST was rolled out in July 2017 and took nearly two years to stabilise, with teething troubles resolved step by step.

After this period came the shock of the COVID-19 pandemic, which left the economy volatile, fiscal space stretched, and revenue collections uneven. Rolling out a major reform then would have risked destabilising both Centre-state relations and household budgets.

If one looks at the global arena, hasty tax reforms have even brought down governments. Canada’s ruling party introduced the GST on 1 January 1991 and widespread public discontent contributed to its loss in the 1993 federal election. Malaysia introduced GST on 1 April 2015 but was forced to scrap it under public pressure on 1 June 2018 after a change in government. Australia too faced years of backlash when it implemented its VAT in 2000.

These incidents make India’s decision to wait a responsible one. The situation in 2025, however, is markedly different. The economy has rebounded, inflation has moderated, and revenue collections have strengthened, providing fiscal room for bold decisions. The Centre and states had adequate time to coordinate under the Group of Ministers, build consensus, and design a compensation framework that works for all.

The new regime has just two standard rates, 5 percent and 18 percent, compared to the earlier four slabs that confused both taxpayers and tax officers. For those with a taste for luxury or for sin, the government has introduced a new 40 percent slab, a reminder that indulgence comes at a price. Even the gutkha eater has been accounted for and taxed accordingly.

The genius of GST 2.0 lies in its simplicity. Taxpayers no longer need a CA on speed dial to guess which slab their favourite item falls under. Critics who dismiss the change as a mere reduction from four slabs to three fail to see that the reform goes much deeper than simple arithmetic.

For the first time, the government has made a genuine effort to make GST not only simpler but also predictable. By rationalising GST, it has reduced the maze of classifications that previously led to endless disputes and litigation. This matters because large corporations can afford armies of CAs and tax experts, but MSMEs cannot, and they form the backbone of the economy.

With fewer and more predictable slabs, businesses can plan better, price better, and operate with less fear of retrospective notices. The result is lower friction in the system, cheaper goods, a boost in domestic consumption, and a stronger market cycle.

Many have been quick to claim that GST 2.0 is a knee-jerk response to the United States imposing a 50 percent tariff on Indian goods. This reform, however, was not crafted in panic. It was years in the making. Its real purpose is to make the system more efficient and predictable, not to play a tit-for-tat game of tariff.

That said, its effects will inevitably strengthen India’s economic resilience. By cutting rates with the middle class in mind, the government is fuelling aspiration-led consumption, a critical engine of growth.

When a middle-class family buys a bike, they dream of a car next. When they buy a fridge, they aim for an air conditioner. GST 2.0 respects these aspirations. Bikes up to 350 cc, petrol cars up to 1200 cc, and diesel cars up to 1500 cc now attract just 18 percent tax, down from 28 percent.

Companies such as Maruti and Tata have already passed on the benefit, slashing prices and sparking fresh demand. Essentials have also been made cheaper. GST on milk, ghee, and paneer has been brought down to 5 percent, giving relief to both middle-class and rural consumers.

The timing is apt. The rollout on the first day of Navratri will turn this policy into a demand multiplier, delivering a festival-season push that shields the economy more effectively than any protectionist tariff could. This is not reactionary economics, it is proactive nation-building.

The real simplification of GST can be best witnessed in the textile sector, an industry long burdened by inverted duties, compliance pressures, and classification disputes. For decades, Indian textile manufacturers faced higher taxes on inputs such as yarn and processed fabric than on the finished apparel itself. This led to embedded costs, refund delays, and cash-flow stress that weakened smaller units. The complex system pushed many value chains out of India and into Bangladesh, where a simpler tax regime made manufacturing more viable.

Under the old patchwork, inputs were often taxed at higher rates than finished goods, creating refund and cash-flow issues. The new alignment, with inputs taxed at 5 percent, reduces refund friction and helps MSME cash flows. The outcome is improved cash flow, fewer disputes, and more predictable pricing. Lower costs make Indian apparel competitive with imports and with production in Bangladesh.

Brands now have a clear commercial reason to reshore manufacturing. Shorter lead times, better margins, and full domestic value capture from yarn to finished garment strengthen the case for India.

By aligning input and output tax rates, GST 2.0 revives confidence in India’s textile clusters, encourages vertical integration, and helps the industry move up the value chain. The outcome is not only cheaper garments for consumers but also more jobs, more domestic investment, and a stronger Make in India story for one of the country’s oldest and most employment-intensive sectors.

This reform is therefore a structural reset, not a cosmetic one.