OPINION | GST 2.0: Modi's next-generation reform for growth and affordability

GST 2.0 reforms are poised to have a transformative impact across various sectors, benefiting consumers, businesses and the broader economy.

India witnessed a historic overhaul of its Goods and Services Tax (GST) regime with the unveiling of GST 2.0, earlier this month, a set of "next-generation" reforms spearheaded by Prime Minister Narendra Modi. The cornerstone of GST 2.0 is its simplified two-tier tax structure, which will now replace the previous four-slab system with primary two rates of 5% and 18%. A new 40% tax rate will apply to only a select group of “sin” goods (e.g., tobacco, cigarettes, pan masala) and luxury items (e.g., high-end cars). GST reforms introduce pre-filled GST returns, faster refund processes, and streamlined registration for Micro, Small, and Medium Enterprises (MSMEs). These measures reduce the compliance burden, particularly for small traders and businesses unfamiliar with digital filing systems.

Simplifying GST for Businesses and Consumers

GST 2.0 also addresses the inverted duty structure, where input taxes exceed output taxes, leading to Input Tax Credit (ITC) accumulation. By aligning input and output tax rates, the reforms free up working capital, particularly for manufacturers, enhancing domestic value addition and supporting the Atmanirbhar Bharat (Self-Reliant India) initiative. The compensation cess, previously levied to support States’ revenue losses post-GST implementation, will cease with the new rates, except for tobacco products.

The new rates are set to take effect from September 22, 2025, coinciding with the start of Navratri, a culturally significant period that marks the beginning of India’s festive and shopping season. Modi has articulated these reforms as adding “Panch Ratna” (five gems) to India’s economy (1) Simpler Tax System: By reducing the number of tax slabs and eliminating classification complexities, GST 2.0 makes compliance easier for businesses and ensures transparency for consumers. (2) Improved Quality of Life: Lower taxes on essentials and aspirational goods reduce household expenses, freeing up disposable income for other needs and improving living standards. (3) Boost to Consumption and Growth: Rate reductions on consumer goods, durables and small cars are expected to spur demand, driving production and economic activity across sectors.(4) Ease of Doing Business: Simplified compliance, faster refunds, and lower input costs encourage investment and job creation, particularly in MSMEs, which are the backbone of India’s economy.(5)Strengthening Cooperative Federalism: The reforms were developed through consensus with State governments, reflecting a collaborative approach to fiscal policy and reinforcing India’s federal structure.

GST Impact on Household Items

By addressing global economic challenges, such as U.S. tariffs, through domestic reforms, GST 2.0 underscores India’s resilience and commitment to self-reliance. GST 2.0 reforms are poised to have a transformative impact across various sectors, benefiting consumers, businesses and the broader economy. The reduction of GST rates on daily-use items such as hair oil, toothpaste, soap, biscuits, namkeen, corn flakes, and instant noodles from 18% or 12% to 5% directly lowers household expenses. Zero-rating essentials like paneer, Indian breads, and UHT milk provides significant relief to low- and middle-income families, particularly in rural areas where food constitutes a large share of expenditure. These changes are expected to act as a buffer against inflation, enabling families to stretch their budgets further.

Zero-rating 33 life-saving drugs, including anti-cancer medicines and reducing taxes on medical items like thermometers and glucometers to 5% further enhances healthcare affordability, aligning with initiatives like Ayushman Bharat and Jan Aushadhi Kendras. The shift of aspirational goods like televisions, air conditioners, refrigerators, washing machines and small cars from the 28% slab to 18% makes these products more affordable for the middle class. The reduction in GST on cement from 28% to 18% also boosts affordability in construction and real estate, supporting housing aspirations. MSMEs, which employ millions and drive economic growth, benefit from simplified compliance, pre-filled returns and faster refunds. Lower tax rates on inputs reduce working capital constraints, enabling small businesses to compete more effectively. The reforms also encourage formalization of the unorganized sector, expanding the tax base and fostering inclusive growth. Zero-rating agricultural products like paneer and UHT milk, coupled with lower taxes on food items, supports farmers and dairy cooperatives.

Lowering Costs for Households and Essential Goods

Prime Minister Modi highlighted the role of dairy farmers in strengthening India’s rural economy, noting that GST 2.0 makes dairy products more affordable and boosts value addition in the sector. GST reductions on renewable energy devices encourage adoption of sustainable technologies, supporting India’s climate goals. By making green energy products more affordable, GST 2.0 contributes to environmental sustainability and energy security. The GST 2.0 reforms are expected to have a net fiscal impact of approximately Rs 48,000 crore. While this may lead to a short-term revenue dip (projected at Rs 1.8 lakh crore or 0.5% of GDP by some analysts), the government anticipates long-term gains through increased consumption, higher production, and improved compliance.

The Modi government’s focus on cooperative federalism has been a big catalyst in addressing State-specific concerns and ensuring smooth implementation. Looking ahead, GST 2.0 sets the stage for further reforms, including potential inclusion of petroleum products and real estate under the GST framework, going forward. By reducing tax slabs, exempting essentials and simplifying compliance, GST 2.0 reforms will raise disposable incomes, increase purchasing power, empower the common man, support small businesses and strengthen India’s growth trajectory. One of the most significant highlights of GST 2.0 is the exemption of individual life and health insurance policies from GST, previously taxed at 18%. The fact that family floater policies and individual health and life insurance will now attract zero GST, is a paradigm shift that will not only redefine affordability but will also give wings to India’s ambitious insurance sector.

(Sanju Verma is National Spokesperson for BJP, an Economist and Bestselling Author of "The Modi Gambit".)

Views are personal and do not represent the stand of this publication.