Published Jul 05, 2026 | 12:16 PM ⚊ Updated Jul 05, 2026 | 12:16 PM
GST 2.0 has its good and bad sides.
Synopsis: India’s GST taxpayer base saw a more than 20-fold expansion of the formal tax net in eight years. Rate rationalisation and a two-slab structure have also been a win. But what is revelatory is who is absorbing the biggest shock…
Less than a year ago, India’s indirect tax system underwent its most significant overhaul since the Goods and Services Tax was first implemented in July 2017.
At its 56th meeting on September 3, 2025, the GST Council recommended that the four-tier rate structure give way to a leaner framework built around two primary slabs, 5% and 18%, with a 40% rate reserved for luxury and “sin” goods. The reform followed Prime Minister Narendra Modi’s Independence Day announcement on August 15, 2025, that next-generation GST changes will focus on three pillars: structural reforms, rate rationalisation, and ease of living. The data so far backs a good part of that promise, but it also reveals who is quietly absorbing the cost of getting there.
The scale of the rate rationalisation is genuinely large.
Essential food items, milk, paneer, butter, cheese, edible oils, biscuits, were cut to 5% or nil, as were selected medicines, diagnostic kits and surgical items, alongside notebooks and stationery. Individual life and health insurance policies such as term life, ULIPs, endowment, family floater and senior-citizen plans, were exempted from GST entirely, along with their reinsurance.
White goods such as air conditioners, televisions, washing machines and cement moved from 28% to 18%, and small cars, motorcycles up to 350cc and auto parts saw the same cut. Fertiliser inputs such as sulphuric and nitric acid dropped from 18% to 5%, directly easing costs for Indian agriculture.
This was not a reform paid for with reckless revenue loss. A study by India’s National Institute of Public Finance and Policy, found that GST rate cuts carry a fiscal multiplier of around (-1.08), higher than personal income tax cuts (-1.01) or corporate tax cuts (-1.02), meaning consumption-led stimulus is stronger per rupee of relief. And the revenue data has held up this.
Gross GST revenues rose to Rs 22 lakh crore in the financial year 2025-26, an 8.3 per cent increase over the Rs 20 lakh crore recorded during FY 2024-2025. According to the Finance Ministry, the Central GST collection in March this year stood at Rs 40,549 crore and State GST is at Rs 53 268 crore. The Integrated IGST collection amounts to over Rs 1 lakh crore.
The estimated annual revenue loss to state governments from the rate cuts of roughly Rs 7,000–9,000 crore was real but modest against the final losses. Analysis of data from the Comptroller and Auditor General of India shows that nine out of 24 states and union territories, for which data is available, have witnessed a contraction in GST collections between April and November 2025 compared to the same period in FY25.
States which have recorded a decline include larger states such as Tamil Nadu (-2.3 per cent), Kerala (-4.1 per cent), Odisha (-7.4 per cent) and Madhya Pradesh (-2.7 per cent). Even the Centre’s own fiscal-deficit impact 2025-26 remained at 4.4% of GDP, lower than the revised estimate of 4.8% of GDP in 2024-25. Furthermore, the Fiscal deficit is estimated to be 4.3% of GDP in FY 2026-27.
The most underappreciated number, though, lies in the formalisation data.
India’s GST taxpayer base grew from Rs 66.5 lakh in 2017 to Rs 1.51 crore in 2026, more than a 20-fold expansion of the formal tax net in eight years. On the MSME side specifically, the Udyam Registration Portal and Udyam Assist Platform together had recorded over Rs 7.30 crore enterprise registrations by December 2025. This includes Rs 4.37 crore registrations on the Udyam Portal and Rs 2.92 crore on the Udyam Assist Platform.
The Union government now puts the MSME sector’s contribution at 31.1% of GDP, 35.4% of manufacturing output and 48.58% of India’s exports. This formal footprint matters beyond tax collection also, as GST filing data is increasingly used by banks and fintech lenders to underwrite working-capital loans for small businesses that previously had no documented financial history.
None of this is free, and the people absorbing the adjustment cost are rarely the ones quoted in the celebratory coverage.
Start with the compliance arithmetic.
Industry research on GST compliance load estimates that micro enterprises spend close to 28.6 hours a month on GST-related filing, reconciliation and notice-response work; small firms spend around 21.4 hours, and medium firms around 15.7 hours. For a family-run shop with no dedicated finance staff, that is a real diversion of the owner’s time and money toward a tax consultant who has become close to a mandatory monthly expense.
Input Tax Credit remains a persistent friction point. An academic study of MSME compliance challenges in Bengaluru South district found that 73% of manufacturers and 61% of traders among surveyed MSMEs cited ITC restrictions caused by supplier-side mismatches in GSTR-2B filings. This means that a small business can lose its rightful tax credit because a supplier filed late, with little recourse beyond absorbing the loss. Working-capital strain compounds this, because GST liability arises at the time of supply rather than the time of payment; a small manufacturer waiting weeks for a client to settle an invoice effectively funds the government before it has been paid itself.
Inverted duty structures illustrate how rate rationalisation plays out unevenly across India’s industrial geography. In Morbi, Gujarat, which produces roughly 80% of India’s ceramic tiles through units that are 90% MSME, industry bodies have repeatedly sought a GST cut on tiles from 18% to 5%, arguing that thin, labour-intensive margins cannot absorb input costs exceeding the tax on the finished product. GST 2.0 corrected several such anomalies in fertilisers and textiles, but clusters like Morbi show that rationalisation is necessarily sequential. Hence, some sectors get relief in a given Council meeting, others wait, and in the meantime, working capital stays locked in unrefunded credit.
There is also a less quantifiable cost associated with the digital adjustment for traders who built their businesses on a diary and a calculator. Monthly e-invoicing and online return-matching represent a genuine shift in how small, often rural or semi-urban, traders are expected to operate, pushing many toward paid intermediaries simply to remain compliant. The government has tried to soften this through a composition scheme for businesses under ₹1.5 crore turnover, an annual-return exemption for those under Rs 2 crore, and auto-approval of registration within three working days for roughly 96% of new low-risk applicants from late 2025. These are genuine concessions, but concessions are not the same as a frictionless system.
Also Read: No, India’s ‘great’ Global Capability Centres aren’t transformational yet
GST 2.0 is a real win, but not a clean one.
Prices fell on insurance, medicine, food, and everyday essentials. Tax collections kept rising, not falling, which means the cuts didn’t hurt government finances much. More small businesses joined the formal system, and that helped many get bank loans for the first time. That part deserves real credit.
But the cost didn’t vanish. It shifted to small traders. Many now lose the tax credit just because a supplier filed late. Paperwork eats hours every month, and most small shop owners now need to pay someone just to stay compliant. Some industries, like the tile-makers in Morbi, are still waiting for a fair rate after years of asking.
So the honest take is simple: GST 2.0 helped India overall, but not everyone equally. The government got the big picture right. What’s left now is fixing the smaller, unfair gaps.
Also Read: Governors vs state governments: Can this 36-hour “constitutional fiction” from Brussels help?
(Edited by R Rajesh Kumar.)
