The Goods and Services Tax (GST) is on the verge of a major overhaul with the implementation of GST 2.0, which is poised to significantly impact consumption, exports, MSMEs, and overall economic growth in India. Effective September 22, 2025, these next-generation reforms aim to simplify the tax structure, ease compliance, and boost domestic demand, potentially offsetting the impact of global trade pressures.

Impact on Consumption

GST 2.0 is expected to provide a substantial boost to consumption by reducing the tax burden on common goods and services. The GST Council has approved a simplified two-slab structure of 5% and 18%, replacing the previous four-tier system. A special demerit rate of 40% will be applied to select luxury and sin goods. Essential items, such as milk, paneer, and medicines, will become cheaper, increasing the disposable income of households, especially in rural areas and among the middle class. Reduced rates on consumer durables like TVs, air conditioners, and small cars are also expected to spur demand. According to Garima Kapoor, executive vice president at Elara Capital, the GST-related demand boost could add 100 to 120 bps to GDP growth over the next four to six quarters.

Impact on Exports

While the reforms are primarily focused on boosting domestic consumption, they are also expected to indirectly support exports. By streamlining tax procedures and expediting refund mechanisms, GST 2.0 can enhance the competitiveness of Indian industries in the global market. Faster refunds, particularly for exporting MSMEs in sectors like textiles, chemicals, and pharmaceuticals, will reduce working capital stress and enable them to offer more competitive prices. Additionally, addressing the inverted duty structure in sectors like textiles and fertilizers is expected to support manufacturing and exports.

Impact on MSMEs

Micro, Small, and Medium Enterprises (MSMEs) are set to benefit significantly from GST 2.0 through simplified tax rates, easier compliance, and faster refunds. The simplified two-slab structure will reduce ambiguity and disputes over product classification, saving MSMEs time and resources. Faster registration processes, with risk-free MSMEs potentially obtaining GST registration within three days, will reduce delays in starting operations. Pre-filled returns, similar to income tax returns, will minimize errors and save man-hours. The streamlining of GST is also expected to promote the transition to sustainable businesses. By reducing the cost of sustainable goods and services, MSMEs can align with consumer preferences and India's green growth agenda.

Impact on Overall Economic Growth

The GST 2.0 reforms are projected to have a significant positive impact on India's overall economic growth. Goldman Sachs has revised India's GDP growth forecast upward to 7.3% for 2025, factoring in both the adverse effects of US tariffs and the positive impact of domestic reforms. The GST restructuring is expected to stimulate private consumption during the festive season, providing a crucial buffer against external economic headwinds. The reforms are also expected to encourage longer-term capacity building within the Indian economy, supporting sustained economic growth and enhancing self-reliance. By simplifying tax structures and improving ease of doing business, GST 2.0 is expected to create a more conducive environment for economic expansion.

Concerns and Challenges

Despite the widespread optimism surrounding GST 2.0, some concerns and challenges remain. Several states have flagged potential revenue losses due to the rate rationalization. The GST Council estimates a total revenue loss of Rs 47,700 crore, while other reports suggest the impact could be as high as Rs 93,000 crore. West Bengal Finance Minister Chandrima Bhattacharya confirmed the Rs 47,700 crore figure, highlighting concerns among state governments about fiscal implications. Karnataka has projected an annual shortfall of Rs 15,000 crore in state revenue, with Revenue Minister Krishna Byre Gauda demanding additional compensation mechanisms. Successful implementation of GST 2.0 will depend on addressing these concerns and ensuring smooth coordination between the central and state governments. Businesses will need to update systems, reprice products, and ensure the benefits of rate reductions are passed on to consumers.