GST 2.0: The big picture

GST 2.0 is a bold towards reset of the indirect tax structure in India.

By Smita Singh and Kshitij Sehrawat 

The 56th GST Council Meeting has launched GST 2.0, a landmark reform that simplifies India’s indirect tax structure with the objective of stimulating consumption-led growth. The Council has replaced the earlier four-rate system into two i.e., 5% and 18%, alongwith a special 40% rate for sin goods.

Essential items such as food, medicines, and personal care products have been placed in the lower slab, while consumer durables, electronics, cement, and small vehicles have seen reductions from 28% to 18%. Health and life insurance are now fully exempt. These changes are expected to ease household budgets, especially for middle-income families, and reduce compliance burdens for MSMEs. The timing, ahead of the festive season, is propitious to revive demand and boost retail sales.

The reforms promise faster refunds, and lower classification disputes, but its success will depend on complementary structural changes and sustained policy clarity.

GST 2.0 is not just about rate cuts—it is a strategic reset of the indirect tax ecosystem. MSMEs, who are struggling with classification disputes and blocked credits, are expected to gain from the simplified structure.

However, the reforms have not clearly addressed the ease of claiming input tax credits, a critical pain point for businesses.

The sunset of anti-profiteering provisions signals a shift toward trust-based governance, while the operationalization of the GST Appellate Tribunal and risk-based refund mechanisms aim to reduce litigation and improve efficiency.

The reform also reflects a broader political consensus, with states playing a decisive role in its approval. As India moves toward its 2047 development goals, GST 2.0 could turn into a foundational pillar—provided it is supported by a structured administrative reset too.

Sector Specific Impact

* Automobile: Compact-class mass marketed vehicles prices are expected to drop significantly, making personal mobility more affordable for middle-income buyers. Meanwhile, luxury vehicles and high-end bikes now fall under a 40% GST slab, replacing the earlier structure of 28% GST plus a compensation cess of up to 22%.

Compensation cess upto 22% was levied on basis category of cars resulting in the effective rate to range between 29-50%. Now, although discontinuation of compensation cess has brought down the total tax, however, it would result in strain in the working capital for dealers with inventory of cars bought at the old tax rates.

The EVs continue to enjoy a low 5% GST rate encouraging eco-friendly choices without added financial burden. There is a clear need to bring in clarity pertaining to treatment of accumulated compensation cess which cannot be utilised now.

* Energy: The Council recommended a major shift for the energy sector by increasing GST rate on coal, lignite, and peat from 5% to 18%, which is a significant jump especially for thermal power producers. This change intends to compensate for revenue loss from other rate cuts but will likely raise input costs for coal-based power generation, potentially leading to higher electricity tariffs unless absorbed by utilities. The higher tax burden could also impact industries dependent on captive coal-based power, such as steel and cement, increasing their operational costs. While the compensation cess on coal has been merged into the GST rate, the overall tax incidence remains higher than before. This may wear down cost affordability of coal power at a time when demand for affordable energy is critical. Additionally, biodiesel witnessed a rate hike from 12% to 18%. These changes, combined with the absence of any relief for petroleum products (still outside GST), indicate a policy tilt toward discouraging fossil fuel reliance while maintaining fiscal balance.

* Real Estate: The rate rationalization is expected to provide a significant boost to the housing and real estate sector. The most notable change is the reduction of GST rate on cement from 28% to 18%, which has an impact on construction costs for residential and commercial projects. Additionally, tax relief on key construction inputs like marble, granite blocks (down to 5%) and renewable energy equipment will further reduce overall project expenses, potentially improving affordability for homebuyers. However, the Council did not address clarity on real estate transactions such as Transfer of Development Rights (TDR) or ITC restrictions under Section 17(5), leaving some structural issues unresolved.

GST 2.0 is a bold towards reset of the indirect tax structure in India, but its success will depend on how well it is implemented and complemented by sector-specific strategies.

The simplification of slabs and exemptions on key services are welcome steps, but businesses must now navigate transitional complexities, especially around pricing, contracts, and ITC optimization. The government’s bet is that lower rates and reduced compliance burdens will expand the tax base and stimulate consumption. However, this must be supported by clarity in classification, promised faster refunds, and improved digital infrastructure to ensure that the benefits reach all stakeholders.

(Smita Singh is Partner and Kshitij Sehrawat, Associate at S&A Laws Offices.)

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