The rollout of GST 2.0 has simplified India’s indirect tax regime by rationalising rates, but it has also led to unintended consequences for several industries. Officials and industry representatives indicate that the reforms have deepened the issue of inverted duty structures, particularly in sectors where input costs remain taxed at higher rates than final products.
The Goods and Services Tax (GST) overhaul, approved by the GST Council in September 2025, removed the 12% tax slab and shifted many goods into the lower 5% bracket. The move aimed to simplify compliance and stimulate consumption. However, it has created a mismatch in tax rates across supply chains.
An inverted duty structure occurs when the tax on inputs exceeds the tax on finished goods. This has become more pronounced after GST 2.0, with many input services such as logistics, advertising, and packaging continuing to attract tax rates of around 18%, while final products are taxed at 5%.
Sectors such as textiles, food processing, and electric vehicles are among the most affected. In the food processing industry, for instance, finished goods were moved to the 5% bracket, while inputs like packaging materials and services remain taxed at higher rates. This has widened the gap between input and output taxes.
A similar pattern is visible in the textile sector, where finished goods are taxed at 5%, but key raw materials and services continue at 18%. Industry representatives say this results in the accumulation of input tax credit, as businesses pay more tax upfront than they can recover through sales.
The issue extends to other industries as well. In the case of vaccines, final products are taxed at lower rates, while specialised inputs and chemicals fall under higher tax brackets. Packaged food products and consumer goods, including stationery items, also reflect this mismatch.
Industry officials explain that the impact is particularly significant for small and medium enterprises. Manufacturers often pay higher GST on inputs such as steel, rubber, or packaging materials, while selling finished products at lower tax rates. The excess tax paid must be claimed as refunds.
However, delays in processing these refunds have led to liquidity challenges. Businesses report that funds remain locked for extended periods, affecting working capital and day-to-day operations. This is especially burdensome for smaller firms with limited financial buffers.
According to officials, the GST 2.0 reforms prioritised demand stimulation by reducing tax rates on final goods. While this approach may support consumption, it did not fully account for tax design principles aimed at avoiding inversion.
Earlier rate rationalisation efforts had attempted to align input and output tax rates more closely. In contrast, the recent changes focused more on reducing prices for consumers, leading to structural imbalances in certain sectors.
The developments highlight the need for further adjustments in the GST framework to address inversion-related challenges. Industry stakeholders have called for corrective measures, including rate alignment and faster refund mechanisms, to ease financial pressure on businesses.