GST 2.0 promises relief on many fronts, but unfinished agenda persists

Despite the sweeping rate and slab reductions, several issues remain unresolved and need to be tackled in the next round of reforms to make GST more viable for businesses, say experts

Excise duty, service tax, value-added tax (VAT), central sales tax, purchase tax, entertainment tax, octroi…. Before the goods and services tax (GST) came into force, on July 1, 2017, people grappled with a maze of taxes, complicated further by multiple rates across the Centre and states. All in all, there were 17 large taxes and 13 cesses. 

The GST regime consolidated these into four main slabs: 5, 12, 18, and 28 per cent. It also eased business operations. Companies no longer needed to maintain warehouses in every state, and the removal of border checkposts brought down the time and cost of logistics. Problems, though, persisted, with commodities and services split into sections and subsections, which invited different rates. 

This, too, has now been simplified. On August 15, Prime Minister Narendra Modi announced that the system would be overhauled and made friendlier. From four slabs, GST is now down to a two-tier rate structure — 5 and 18 per cent — along with a peak rate of 40 per cent for demerit goods and a few superluxury cars. The 12 and 28 per cent slabs have been done away with altogether. 

The aim is to make common-use items cheaper and resolve classification disputes. The GST Council has also addressed the issue of inverted duty structure in sectors like textiles, fertilisers, and leather goods. 

The reforms, being called GST 2.0, will kick in on September 22. 

Despite these changes, experts are of the view that a number of issues remain unresolved and need to be tackled in the next round of reforms to make GST more suitable for businesses. 

Multiplicity of rates 

One of the biggest unfinished tasks under GST 2.0 is the continued multiplicity of rates. In mature economies, the trend is towards simpler GST/VAT structures — either a single uniform rate or a standard rate, with one or two reduced rates. 

While the 12 and 28 per cent slabs have been merged, exceptions remain, with rates as low as 0.25 per cent and 3 per cent, and proposals as high as 40 per cent for select goods. Experts say that convergence towards a genuine two-rate structure — and eventually a single rate — would simplify compliance, reduce classification disputes, and make GST closer to the original vision of “one nation, one tax”. 

“The ideal GST structure, from a pure tax policy perspective, would be a unified or dual rate system,” said Saurabh Agarwal, partner at EY. “However, in a diverse economy like India, with significant income disparity, this is a complex transition that will take time.” 

The matter of blocked credit 

The very idea of GST was to make it a tax without cascading effect — which means businesses should be able to take credit for the tax paid on all inputs used in their operations. However, this principle is still not applied fully in India. 

Section 17(5) of the Central Goods and Services Tax (CGST) Act blocks input tax credit (ITC) on key items like cement, steel, and other goods and services used in the construction of immovable property, as well as on employee-related expenses such as group insurance or health benefits. Industry experts argue that these restrictions go against the spirit of GST, since these costs are directly linked to running a business. 

“These restrictions help in collecting more tax in the short term, but they go against the basic idea of GST and lead to double taxation,” said Abhishek Jain, partner with KPMG. He added that if businesses were allowed credit on such costs, it would bring down project expenses, make companies more competitive, and show that GST is moving into a mature, business-friendly phase. 

Key sectors still excluded 

When GST was implemented eight years ago, items like petroleum products, electricity, alcohol, and real estate were kept out of it. Products like alcohol and petroleum generate significant income for state governments, while stamp duties on real estate and electricity levies are major fiscal sources. Inclu­ding them in GST would have meant states losing direct control over these revenues. They would have been reluctant to give up their fiscal autonomy. 

Besides, petrol, diesel, and power are state-regulated items. Each state sets its own tax rates, electricity tariffs, and policies. The complexity of aligning rates and subsidies across states for these items posed a practical challenge during GST’s rollout. 

However, experts maintain that excluding these key items from the GST net makes Indian industry less competitive. 

“For instance, airlines cannot claim ITC on aviation turbine fuel, and manufacturers using petroleum-based inputs face higher costs,” said Pratik Jain, part­ner at PricewaterhouseCoopers India. “Similarly, state levies on electricity are not creditable, raising power costs for industries like steel and cement.” His view is that keeping electricity and petroleum outside GST breaks the credit chain, and that the GST Council should try to bring these within its ambit as part of the next phase of reforms. 

The refund limitation 

While GST allows refunds under an inverted duty structure, this relief is limited to input goods. Input services remain outside its ambit. 

Industries, such as packaging, construction, pharma, textiles, etc, often pay higher GST on services in the form of legal fees, and consultancy and professional charges, but cannot claim a refund even when their output is taxed at a lower rate. Experts point out that this, to an extent, breaks the seamless credit chain envisioned under GST. 

“The inability to claim ITC on input services under an inverted duty scenario adds to the working capital burden for certain manufacturers — after the non-availability of such refunds on input services was crystallised by a Supreme Court judgment in the case of VKC Footsteps,” said Vivek Jalan, partner with Tax Connect Advisory Services. 

According to Krishan Arora, partner and leader, Indirect Tax with Grant Tho­r­nton Bharat, health and life insurance exemptions have created an issue of sunk input tax costs. He said in the pha­rma sector, there could be potential tax inversion situations since active pha­rm­aceutical ingredients are still taxed at 18 per cent, while finished pharma go­ods are either exempt or largely taxed at 5 per cent. This, coupled with input services at 18 per cent, is leading to credit accumulation, which may be a challenge. 

Simplification and compliance 

Even though GST was meant to simplify India’s indirect tax system through technology, businesses continue to feel the burden of compliance. 

Companies must have separate registrations in every state where they operate, file multiple returns, and often struggle with delays in getting refunds. State-level audits and varying practices across jurisdictions add another layer of uncertainty. Industry bodies have long argued that the system should move closer to a “one nation, one registration, one return” model. 

“Streamlining these requirements, reducing multiplicity, and creating a more business-friendly compliance environment would significantly improve ease of doing business and align India’s GST system with global best practices,” said Harpreet Singh, partner with Deloitte India, while making a case for “one nation, one registration, one return”. 

Interpretational issues 

The GST system also continues to suffer from several interpretational issues, such as the treatment of corporate guarantees and allocation of tax credit on common services. 

For instance, while corporate guarantees are usually a routine support extended within a business group without any money changing hands, GST law now deems them a taxable “supply,” even without consideration. This has sparked disputes over whether such guarantees should be taxed at all, and if so, how should they be valued. 

Similarly, companies are unsure whether to distribute input tax credit through the input service distributor (where the head office collects credit on common services and passes it proportionately to branches) or through cross-charging (where the head office raises invoices to branches, treating them as a supply of services). 

“There is still a lack of clarity on how to split input service credit between the input service distributor mechanism and cross-charge, which has led to divergent practices across industry,” said Singh of Deloitte. “Incorrectly opting for one over the other may invite unwarranted scrutiny from tax authorities.” 

The unresolved issues notwithstanding, there is no doubt that GST today is on stronger footing than it was when it began in 2017. The hope is that the GST Council would continue the process of reforms in the years to come. 

Unfinished agenda

 

Multiplicity of rates

Slabs of 0.25%, 3% and 40% remain despite a two-tier revamp

 

Blocked ITC

No credit on inputs used in construction of immovable property and employee expenses such as group insurance

 

Exclusion of key sectors 

Petrol, alcohol, electricity, real estate remain outside GST

 

Inverted duty refunds

Relief limited to goods; input services not covered

 

Sectoral ITC challenges

Pharma, health insurance, and freebies face ITC hurdles under GST 2.0

 

Heavy compliance

Multiple registrations and returns continue; industry seeks “one nation, one registration, one return”

 

Interpretational disputes

Corporate guarantees, input service distributor versus cross-charge, etc, risk litigation