By Dr. Samar Verma*
GST 2.0 Balances Growth, Climate Trade-offs
When designed and administered well, the Goods and Services Tax (GST) lowers hidden costs, clarifies prices for consumers, and lets businesses sell across state borders without tripping over conflicting rules. India’s latest upgrade- shorthand “GST 2.0”- moves the system closer to this textbook design. The GST Council has consolidated the structure into two principal slabs (5% and 18%), while reserving a 40% rate for a narrow set of de-merit/luxury goods. The package becomes effective on September 22, 2025, and is paired with process simplifications meant to reduce classification disputes, speed refunds, and cut compliance time.
The declared thrust is affordability for households and ease of doing business for firms. This is welcome and offers a timely opportunity for sharpening domestic industry competitiveness.
The first-order effects will show up in household monthly baskets. Coverage across major dailies and official FAQs points to rate reductions on widely used FMCG items and corrections on several services, including relief on certain insurance products. In autos, the rejig nudges small cars and two-wheelers toward the 18% bracket while keeping high-end vehicles at 40%- a rebalancing that softens prices where demand is most elastic. Carmakers have already begun signalling pass-throughs. The net message to households is straightforward: modest relief on essentials and entry-level durables, just ahead of the festive season when purchasing is most active.
Two caveats deserve attention. First, transitional pricing is messy; inventories procured under old rates meet new MRPs, so clear anti-profiteering guidance and time-boxed oversight will help ensure pass-through without chilling investment. Second, sectors like jewellery still flag anomalies (e.g., treatment of making charges) that can create perceptions of “tax-on-tax”; these should be addressed through clarifications rather than blanket carve-outs to preserve the integrity of the chain.
For firms – especially MSMEs – the big gains are not a single percentage point on a sticker price but the reduction of friction. Fewer slabs mean fewer grey zones – and therefore fewer notices and classification disputes. Correcting inverted duty structures (where inputs were taxed more than outputs)- such as in fertilisers and textiles- releases working capital otherwise stuck as unutilised credits. If refund processes become genuinely time-bound, exporters and inter-state suppliers will experience GST as a financing aid rather than an administrative obstacle. Over time, that reallocates managerial energy from paperwork to production- precisely the kind of micro-efficiency that compounds.
The macro logic has long support in Indian research: rationalised, creditable VAT-type systems reduce cascading, improve allocative efficiency, and bolster competitiveness, especially when logistics frictions decline. That evidence is directionally consistent even when estimates differ on magnitudes. (For readers who don’t live and breathe economics, the Goods and Services Tax (GST) is best understood as a value-added tax (VAT): a firm pays tax on what it sells, but can claim the tax already paid on its inputs. That input-tax-credit chain prevents the same value from being taxed repeatedly and replaces a patchwork of state and central levies with a more uniform, consumption-based system).
How does GST 2.0 speak to India’s clean-growth ambitions? The picture is mixed. On the positive side, the Council has retained the concessional 5% rate on electric vehicles – a continuity signal that reduces policy risk for Electric Vehicle (EV) manufacturers and buyers. It has also cut GST on renewable-energy devices and parts from 12% to 5%, which should lower project capex and, by extension, tariffs over time. Those moves directly support decarbonisation by making EVs and renewables more affordable and bankable.
Other choices temper the “green” tilt. Cement- a carbon-intensive input- drops from 28% to 18% to support housing and infrastructure. In autos, while EVs keep the 5% rate, cuts for small internal-combustion vehicles can nudge demand back toward fossil mobility if not offset by complementary policies (fuel standards, scrappage, targeted incentives). And the coal decision is nuanced: GST rises from 5% to 18% but the ₹400/ton compensation cess is removed and the levy is folded into GST, allowing input tax credit and, according to several analyses, lowering generation costs at the margin for many utilities. That helps near-term energy affordability but dilutes the explicit carbon price signal unless other instruments (renewables obligations, emissions trading pilots) step in. Thus, GST 2.0 contains green-aligned measures, yet remains primarily a simplification-and-affordability reform rather than an emissions-linked tax design.
This suggests a constructive next step. A calibrated “green GST” overlay could exploit the now-simpler structure to send sharper decarbonisation signals without sacrificing revenue stability: accelerated refunds for certified low-emission inputs and efficiency upgrades; neutral treatment where technologies are substitutable; and a carefully defined de-merit approach for high-emission goods aligned with India’s nationally determined contributions. That would embed climate incentives into day-to-day tax administration rather than rely solely on sporadic schemes.
Timing matters too. The geopolitical backdrop raises the stakes. With the United States now imposing tariffs of up to 50% on a wide range of Indian exports, the external environment has shifted abruptly. A domestic tax reform cannot neutralise geopolitics, but it can improve unit economics and cash-flow resilience. The government has signalled export-oriented support to cushion the blow; GST 2.0’s simplification and quicker refunds would amplify that cushioning effect by reducing the cost of working capital and smoothing supplier payments along export chains. For labour-intensive sectors such as textiles, gems and jewellery, leather goods and auto components – several of which are tariff-exposed – the combination of liquidity support and cleaner input credits can help protect jobs while firms diversify markets.
What should firms do now? Three strategic moves follow. One, diversify markets and suppliers. Use a quicker refund cycle and cleaner credit chains to finance entry into East and Southeast Asian value chains and to hedge exposure to any single tariff wall. Second, move up the value curve. When input taxation is predictable, the payoff to quality upgrades, energy-efficiency retrofits, and product design rises. For exporters, this also builds resilience against tariff headwinds by competing on value, not just price. Finally, formalise deeper. The benefits of GST flow best when the entire chain can claim and pass credits. Anchoring smaller suppliers into compliant networks converts tax design into a competitiveness premium.
No reform, however, is without trade-offs. Rate cuts and credit clean-ups affect revenues in the short run. States have legitimate concerns about fiscal space; these must be addressed through transparent data-sharing and a credible medium-term revenue path, including realistic buoyancy assumptions. Transitional anti-profiteering oversight should be narrowly scoped, time-bound, and evidence-led, strong enough to ensure pass-through to consumers, but not so heavy-handed that it invites rent-seeking or chills investment.
Institutional plumbing will decide whether the reform feels real. Litigation has grown in recent years; a fully staffed appellate tribunal network and end-to-end digital processes (pre-filled returns, straight-through refunds, single-window support) are essential. The aim should be unambiguous: refunds that are predictable and clock-bound; guidance that arrives before, not after, compliance seasons; and data systems that make routine compliance almost invisible.
Overall, while GST 2.0 may not qualify as a comprehensive reform, it does offer a balanced verdict with an eye on the next frontier. The to-do list is clear. Keep refunds on a timer and publish granular FAQs quickly – especially for sectors with historically high dispute intensity. Issue early circulars to prevent fresh inverted structures from emerging as supply chains adapt. Coordinate with energy and environment ministries so that the coal-renewables rebalancing is complemented by power-sector reforms and carbon-efficiency incentives. And possibly consider, in the next round, a measured “green GST” layer that rewards climate-resilient choices without derailing growth.
The GST 2.0 offers a real promise. If we execute on those basics, GST will recede as a headline and settle into what it ought to be: a reliable platform on which India’s producers can build and consumers can plan as the economy advances toward its long-term goals of inclusive development powered by clean, green growth engines.
*Dr. Samar Verma is an economist, public policy professional and an institution-builder, with 28 years of experience in economic policy research, international development, grant management and philanthropic leadership. The views expressed are personal.
