As GST 2.0 kicks in, what changes for consumers and industry?

The rate rejig for the eight-year-old consumption-based tax has been done across sectors such as agriculture, textiles, fertilisers, health, construction, transport and renewable energy. Termed as GST Bachat Utsav by Prime Minister Narendra Modi on Sunday, the rate rationalisation is meant to leave more disposable income in the hands of people, which is seen spurring household consumption and which in turn could incentivise investments. The government has also placed its bet on the potential consumption boost as it expects it will help it offset the revenue loss arising from the rate cuts on over 375 items.

Streamlining the processes for registration, returns and refunds will be next on the implementation agenda for the government as it has already taken the nod for those proposals from the Goods and Services Tax (GST) Council. The government will also have to look into the representations being made by some sectors where the inverted duty structure (IDS) persists, especially with value-linked thresholds for GST rates, to correct them in the future.

The GST slab tweaks

The GST regime, rolled out in July 2017, subsumed 17 indirect taxes and 13 cesses, has seen over a dozen rounds of rate tweaks so far. But this round of reforms focused on a major restructuring of GST slabs. The multiple slabs – 5 per cent, 12 per cent, 18 per cent and 28 per cent – were replaced with a broad two-slab structure – a merit rate of 5 per cent and a standard rate of 18 per cent – in addition to a special demerit rate of 40 per cent for sin and demerit goods such as pan masala, tobacco and cigarettes.

Effective September 22, the GST rates are now 0.25 per cent for rough diamonds and precious and semi-precious stones; 1.5 per cent for cut and polished diamonds; 3 per cent for precious metals such as gold, silver and pearls; 5 per cent for 516 categories of goods and services including mostly food items, some medical devices, agricultural machinery, hydrogen vehicles based on fuel cell technology; and 18 per cent for 640 categories of items including industrial goods such as machines, boilers, chemicals, paints, automobile parts, small cars and bikes.

The demerit rate of 40 per cent applies for now to 13 categories of items such as smoking pipes, aerated waters, non-alcoholic, caffeinated and carbonated beverages, yachts, aircraft for personal use, and bigger cars and bikes. Tobacco and tobacco-related products, which continue to be in the old rate structure of 28 per cent plus compensation cess, are also going to be in the topmost slab along with a yet-to-be finalised levy over and above the 40 per cent rate.

The 12 per cent GST slab, which has been removed for all other items, continues to be retained for one category of goods — bricks. Bricks, except sand lime bricks, have been retained in the 12 per cent slab with input tax credit.

The FAQs issued by the Ministry of Finance stated that effective April 2022 the GST rates for bricks were set at 6 per cent without ITC and 12 per cent with ITC under a special composition scheme for all bricks other than sand lime bricks.

“Under the scheme, bricks attract GST of 6 per cent without ITC and 12 per cent with ITC with threshold limit for bricks at Rs 20 lakh instead of Rs 40 lakh as is applicable to goods. The GST council in its 56th meeting held on September 3, 2025 did not recommend any change on the special composition scheme rates except on sand lime bricks on which the GST rate has been recommended to be reduced from 12 per cent to 5 per cent,” it said.

Services have also been in focus in this rate rationalisation process. Welfare services like health and life insurance for individuals have been exempt from 18 per cent GST earlier. Hotels with per day tariff rate of below or equal to Rs 7,500 have seen a cut in GST rate to 5 per cent without ITC from 12 per cent with ITC earlier. Salons and well-being services such as spas have also seen a reduction in the GST rate to 5 per cent from 18 per cent.

Passing benefits to consumers

Household budgets are expected to get a boost from the GST rate cuts and the ensuing price cuts by companies. Even as the government does not have a legal provision in force to act against profiteering by companies, the Finance Ministry has asked its officers in the field to compile monthly data reports on price change of commodities pre- and post-GST rate rationalisation. Monthly reports for the price change by companies will be compiled by the Ministry for the next six months in a bid to ensure that the benefits get passed on to the consumers.

The price change data will be compiled for 54 categories of items including food items such as condensed milk, butter, cheese, ghee, ultra-high temperature (UHT) milk, dry fruits, chocolates, biscuits and cookies, cornflakes, soya milk drinks, tomato ketchup, jams, ice cream, cakes along with drinking water bottles. Data for price change will also be compiled for other common-use items including toilet soap bars, hair oil, shampoo, toothbrush, toothpaste, dental floss, talcum powder, face powder, shaving cream and lotion, aftershave lotion, and educational items including mathematical boxes, erasers, pencil sharpeners, pencils, crayons, notebooks, exercise and graph books.

Companies had already announced a series of steep discounts, extra grammage, or other deals such as shopping vouchers to entice customers in the run-up to the September 22 GST 2.0 rollout. Other companies will follow suit from today onwards as they bring into effect the changes under the GST 2.0.

Inversion, the second-round impact

The multiplicity of rates had made the GST structure complex, directly impacting the ease of doing business and trade and the cost of living of citizens particularly the poor and the middle class. The plaguing issue of inverted duty structure (IDS) had also affected cash flow and working capital of businesses as they used to seek refunds for the accumulated input tax credit. Even though the IDS is tough to eliminate completely, placing similar items in the same tax bracket is expected to help ease the pressure points for businesses.

Some industry associations have, however, already flagged concerns about inversion issues. While the industry found relief in a large section of the value chain, but some items such as bicycles, tractors, fertilisers and a few types of textiles continue to face inverted duty structure as raw materials and inputs face higher tax than output. The significant gaps between certain inputs taxed at 18 per cent and final products taxed at 5 per cent have raised concerns over capital blockage for some sectors.

For instance, steel continues to attract 18 per cent GST while final products like bicycles and e-bicycles are in the 5 per cent GST slab. Also, GST cuts were announced for the manmade textile sector, with manmade fibre seeing the tax rate being cut to 5 per cent from 18 per cent and manmade yarn to 5 per cent from 12 per cent. But, inversion in tax structure continues for a few items such as the inputs required for polyester fibre and textile machinery.

Similarly, corrugated box manufacturers have also flagged concerns about inversion, saying that the rate for such boxes has reduced to 5 per cent from 12 per cent but the rate for inputs such as kraft paper and board has been raised to 18 per cent from 12 per cent.

The industry is, however, likely to find some relief on the compliance front. For registration, returns and refund, GST 2.0 seeks to streamline the registration process by making it more technology driven and time bound especially for small businesses and startups. The return filing process stands to benefit as the plan seeks to implement pre-filled returns to reduce manual intervention and mismatches.

Similarly, the refund process will be automated for faster clearance and automated processing of refunds for exporters and those with inverted duty structure. Also, the GST Council has given its nod for amendments in Section 54(6) of the Central GST (CGST) Act, that will pave the way for risk-based provisional sanction of refunds arising from the inverted duty structure. “The Council recommended amending section 54(6) of the CGST Act, 2017, to provide for sanction of 90 per cent of refund claimed on provisional basis, in cases arising out of inverted duty structure, on similar lines as is presently available for refund in respect of zero-rated supply,” the statement issued after the 56th GST Council meeting said.

Pending these amendments, instructions will be issued by the Central Board of Indirect Taxes and Customs (CBIC) to direct central tax field formations to grant provisional refund equivalent to 90 per cent of amount claimed as refund, arising out of the inverted duty structure on the basis of identification and evaluation of risk by the system, as in the case of provisional refunds on account of zero-rated supplies. This is likely to be operationalised from November 1 and the timeline may get advanced to October, an official said.