GST 2.0: A Promise Under the Microscope

“GST 2.0: A bold tax reform billed as the path to cheaper goods but will the savings reach your pocket?”

A household excited about Diwali price cuts, only to find that their mobile phone or refrigerator remains stubbornly expensive because of hidden components and exchange rate pressures.

On 3 September 2025, the 56th GST Council meeting approved a sweeping overhaul of India’s indirect tax regime dubbed “Next-Generation GST Reform” or GST 2.0 to take effect from 22 September. The package compresses the existing slab structure (eliminating 12% and 28%), merges many items into two main rates (5% and 18%), and introduces a 40% rate for luxury and sin goods.

In public statements, the government presents GST 2.0 as a trifecta of consumer relief, simpler compliance, and demand revival. As Prime Minister Modi put it, the reform would be a “Diwali gift” for households. Finance Ministry and GST Council releases promise easier filing, faster refunds, rationalised slabs, and lower tax burdens on everyday items.

But beneath the gloss, deep structural tensions may erode much of the welfare gain. This blog unpacks why the headline “prices will fall” claim holds only in limited domains, not universally.

1. Producers still pay indirect taxes on inputs the ITC bottleneck

The logic of GST: output tax minus input credits

Under the GST regime, manufacturers compute their tax liability as the tax on final goods minus Input Tax Credit (ITC) for taxes already paid on inputs. In theory, this ensures taxation only on the value added. But two mechanisms blunt that logic in practice:

a) Input rates exceeding output rates (inverted duty structure)

When raw materials or intermediate goods carry GST at rates equal to or higher than the finished product, producers cannot fully reclaim their credits. For instance, synthetic yarn, fibers, or chemicals may attract 12% or 18% GST even when downstream textiles are taxed at 5%. This mismatch forces the producer to shoulder a net tax cost, eroding any benefit from output rate cuts. Many industries have flagged this inversion issue, and the government’s own FAQs warn that exempting inputs outright can break the credit chain and shift cost burdens to buyers.

The reform does attempt to correct some inverted duty anomalies like in fabrics or fertilizers but full correction across sectors is difficult and gradual.

b) Refund delays, compliance frictions, and working capital constraints

Even when ITC is legally available, many manufacturers especially MSME and smaller units struggle with delayed refunds, documentation burdens, or mismatches during reconciliation. These delays tie up working capital. When a firm is uncertain if and when its credit will be reimbursed, it is less confident about reducing its final price. Thus, even rate cuts may not result in immediate or full pass-through to consumers.

In short: the net effective tax wedge that can fall is not just the drop in output GST, but output cut minus unrecoverable or delayed input taxes. Because that varies by sector and firm, so will actual consumer benefits.

2. Rupee depreciation intensifies cost pressure on imported inputs

Even a perfect tax reform can be undermined by exchange rate volatility. India imports a substantial fraction of raw materials, specialty components, chemicals, metals, microelectronics, and intermediate goods. A weakening rupee inflates these costs in rupee terms, exerting upward pressure on producers.

So the chain is: rupee weakens ➡️ imported inputs cost more ➡️ producers face higher costs ➡️ they either absorb losses (if competitive pressure allows) or raise downstream prices (if markets permit).

Analysts caution that India’s recent progress on disinflation could be derailed by such imported cost pressures, especially in sectors heavily dependent on foreign inputs. One Moneycontrol article warned that depreciation would escalate costs in these sectors, offsetting GST cuts.

Recent currency trends underscore the risk: 

the rupee has breached ₹88 US$ levels, marking fresh lows and stirring concern among importers and corporations about hedging and cost escalation.

To illustrate, according to Business Standard, the rupee hit a record low of 88.79 dollar amid fears around U.S. visa policy and trade pressures, pushing import costs for many sectors upward.

Furthermore, government data on inflation suggests imported inflation is a meaningful component: the Ministry’s “Inflation and Economic Trends” report (March 2025) shows the share of imported inflation rising (like precious metals, oils, chemicals) even as overall CPI inflation moderated. 

Thus, even if GST 2.0 reduces tax burdens, imported inflation can partly or wholly absorb those gains before they reach the consumer.

3. Why the joint effect is dilution (or leakage) of the promise

When you layer the two forces input tax constraints and import cost escalation much of the theoretical consumer upside starts leaking out.

Multi-tier supply chains magnify leakage

Modern manufacturing involves many stages from raw materials to subassemblies to final assembly. Each tier may face input tax mismatches or currency-driven imported cost spikes. The cumulative burden compounds, leaving less headroom for pass-through at each stage.

Firms may strategically retain part of the gain

Firms with some market power or vertical integration may choose not to lower prices fully  instead bolstering margins or smoothing across product lines. If GST reforms reduce cost variance, some margin “slack” may be captured internally unless competitive pressure is strong.

Heterogeneity in pass-through

Thus, the promise “prices will come down” remains credible only in sectors where: Input tax burdens are already low (i.e., limited inversion) Supply chains are relatively simple (few stages)

Import dependence is minimal

In those sectors, the tax cut is less contested and less offset by external inflation. But in others, consumer price declines may be modest or even absent.

In the automotive sector, some manufacturers have already announced price reductions for selection of models that predominantly use domestic input content and benefit more from the 28 to 18 shift.

In contrast, in textiles and synthetic yarns, industry voices warn that the inversion problem remains serious. Many firms argue that the “relief” is illusory unless input GST rates are aligned.

5. Bridging the gap: what the government must do

If GST 2.0 is to deliver more than optics, complementary steps are vital:

i. Accelerate inversion correction

Each sector where intermediate goods are taxed higher than outputs must be revisited. Input rates should be adjusted downward or output rates raised temporarily until the mismatch is resolved.

ii. Automate refunds & ITC reconciliation

The quicker and more transparent refunds are, the more firms can confidently price downward. Real-time reconciliation and digital automation (for MSMEs especially) is essential.

iii. Hedging and import mitigation strategies

For sectors reliant on foreign inputs, incentives for localization, import substitution, or strategic hedging tools can soften rupee‐driven shocks. Supporting domestic upstream manufacturing (like electronics parts, speciality chemicals) also helps.

iv. Monitor and report pass-through outcomes

The government should publish quarterly metrics that compare pre‐ and post‐reform price changes across product classes, adjusting for input and currency effects. This allows policy calibration, accountability, and understanding of where complementary measures are essential.

v. Build buffers for vulnerable sectors

In sectors where neither tax cuts nor hedging shield enough, targeted transitional support (like phased rate relief, concessional credits) may be needed.

6. Case Studies

Automobiles: Maruti and other automakers announced cuts on select models where GST shifted from 28% to 18%. But premium models with imported components saw no meaningful reduction.

Textiles: Industry associations warned that inverted duty issues remain unresolved. Synthetic yarn taxed higher than finished goods continues to erode benefits.

Coal & Power: GST on coal rose (5% to 18%) but cess removed. The change frees liquidity for producers but may not translate into immediate household relief, instead improving sectoral efficiency.

7. Policy Fixes: Making GST 2.0 Work

If GST 2.0 is to be more than optics, complementary steps are essential:

Fix inverted duties : Align input and output rates sector-wise.

Automate ITC refunds : Speed and transparency are critical for MSMEs.

Support import-heavy sectors : Encourage localization, offer hedging tools, and buffer against rupee volatility.

Track outcomes : Publish quarterly data on price pass-through by sector to ensure accountability.

Sector-specific relief : Provide transitional measures in industries facing severe inversion or global commodity shocks.

8. The Bigger Picture

GST 2.0 matters. Simplifying slabs, reducing rates, and cutting compliance clutter is progress. But a tax cut alone cannot fight structural input costs and currency headwinds.

Consumers will feel relief in everyday staples and simpler goods. But in industries where inputs are taxed more heavily than outputs or imported at a higher rupee cost, prices may remain stubbornly sticky.

"GST 2.0 is not irrelevant but without fixing input credits and shielding against the rupee, its promise of cheaper goods risks becoming more mirage than miracle.”

The insight review 

Upasna Sharma