India's Goods and Services Tax (GST) Council has recently approved a comprehensive overhaul of the nation's indirect tax framework, effective September 22, 2025. This "GST 2.0" reform aims to simplify the tax structure, correct systemic inefficiencies, and stimulate domestic economic activity. The changes, which include a shift to a streamlined two-slab system, are expected to have a wide-ranging impact on various sectors, with smaller firms potentially poised to benefit significantly.
The most significant change is the reduction of the existing four-tier GST system to a simpler two-rate structure. A Merit Rate of 5% will apply to essential goods and services, while a Standard Rate of 18% will cover most other items. A Demerit Rate of 40% will be applied exclusively to luxury and sin goods. This simplification is intended to reduce disputes, improve transparency, and make GST administration more efficient for businesses and tax authorities. The complicated GST slabs that gave headaches to small traders after the flagship tax overhaul came into effect eight years ago, has been cleaned up by the government.
Several administrative improvements have also been approved to enhance business operations. A Simplified GST Registration Scheme promises registration for low-risk businesses within three working days, benefiting approximately 96% of new applicants. The enhanced refund mechanism ensures exporters receive refunds within seven days, compared to months of waiting under the previous system. Additionally, an automated refund process will be implemented for small businesses with refund claims under ₹1,000 crore, eliminating manual intervention and reducing processing time. The operationalization of the Goods and Services Tax Appellate Tribunal (GSTAT) will address the backlog of over 40,000 pending cases, providing certainty for taxpayers facing disputes.
The GST overhaul is expected to catalyze structural changes in India's economy. The simplified tax structure will encourage greater formalization of businesses as compliance becomes easier and more predictable. This formalization will expand the tax base and improve revenue collection efficiency over time. The reform will also boost manufacturing competitiveness by reducing input costs and eliminating tax-related distortions in production decisions.
For small and medium-sized enterprises (SMEs), the GST changes could be particularly beneficial. Reduced tax rates on several essential products will enhance ease of living, help families manage costs, and bring relief to different sectors. This reform will strengthen the ease of doing business and empower small businesses across the country. The banking sector is also expected to benefit substantially, with expected increases in demand for credit and financial services, particularly in the retail, agriculture, MSME and renewable energy sectors.
Several manufacturing-linked job work services will now enjoy lower GST rates. Job work for umbrellas, printing, bricks, pharmaceuticals, and leather has been reduced from 12 percent to 5 percent, while retaining ITC. This directly lowers outsourcing costs for industries reliant on contract processing.
However, not all sectors will benefit equally. The gems and jewellery sector, for example, was excluded from the latest changes. While the rationalization of GST rates is good for consumption, the demand will move up once there is an uptick in purchasing power, which will take a couple of more quarters.
Overall, the GST overhaul is expected to boost consumer demand, support exports, and strengthen local markets. The new rates are expected to boost consumer demand, with the overall fiscal impact of the overhaul estimated at around Rs 50,000 crore. The changes aim to reduce disputes, improve transparency, and make GST administration more efficient for both businesses and tax authorities.
