India's GST 2.0 Reforms Narrow Rates, Widen Inverse Duty Disparities Across Certain Sectors

GST 2.0 Reforms Worsen Inverted Duty Structures, Hurting Businesses

The Goods and Services Tax (GST) 2.0 reforms, aimed at simplifying rates by scrapping the 12 percent slab and moving many goods to the 5 percent bracket, have instead worsened inverted duty structures in sectors such as textiles, food processing, and electric vehicles. This has locked up working capital and squeezed businesses, according to government and industry officials.

The inverted duty structure has worsened in several sectors, with taxes on inputs being higher than those on the final product. This has widened the gap between input and output tax rates, particularly in sectors where services form a significant part of the cost structure. Food and food processing, electric vehicles, and other sectors heavily dependent on services or capital goods are among the most impacted.

Following the rationalisation, input services continue to be taxed at around 18 percent in several sectors, while output rates in many sectors have been reduced to 5 percent. This mismatch is most evident in sectors where services account for a significant share of costs. For instance, in food processing, the inversion has become more pronounced after finished goods were moved from 12 percent to 5 percent GST, while key inputs like packaging, advertising, and other services continue to be taxed at 18 percent.

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The issue cuts across industries, with textiles being one of the worst affected. Finished goods are taxed at 5 percent, while key inputs and services remain at 18 percent. This creates an inherent inversion and results in accumulation of input tax credit. Vaccines present a similar case, with final products taxed at 5 percent, but specialised inputs, chemicals, and packaging falling under higher tax slabs.

Even in packaged food, the final product is taxed at 5 percent, but inputs like aluminium foil used for packaging are taxed at 18 percent. This mismatch continues across several consumer goods, including stationery items, where finished products have been reduced but inputs remain in the higher tax bracket.

For India's smaller businesses, this has resulted in daily financial strain. Companies pay more GST upfront than they can recover through sales, leading to a build-up of input tax credit that must be claimed as refunds. However, these refunds are often delayed due to procedural hurdles and strained state finances, leaving funds stuck for months and tightening liquidity, especially for smaller manufacturers.

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Under GST 2.0, the priority moved toward stimulating demand rather than correcting inversions. The broader issue is that GST 2.0 focused on boosting demand by reducing rates, but tax principles were not fully factored in. Earlier, rate rationalisation was done keeping inversion in mind, but this time the focus was more on commodities and consumption rather than the tax structure.

The GST 2.0 rate rationalisation, approved by the GST Council on September 3, 2025, and implemented from September 22, 2025, marked one of the biggest overhauls of the goods and services tax since its launch.