How Would GST Affect India; Examination By The RBI

India’s move to implement GST 2.0 from 22 September 2025 marks one of the boldest tax reforms in recent years. The new regime, featuring just two main GST slabs (5% and 18%) plus a 40% “sin/luxury” slab, seeks to simplify tax compliance, correct inverted duty structures, boost consumption, and re-energize growth. 

In this article, we explore how the RBI has assessed these reforms, examine the expected macro and state-level impacts, and offer a balanced view of opportunities and risks.

Simplification and Structural Design of GST 2.0

The most visible change in the GST overhaul is the compression of multiple slabs into a leaner structure. Earlier, India’s GST regime had rates like 5%, 12%, 18%, 28%, plus special cesses, which led to confusion, classification disputes, and inverted duties (where inputs had higher tax than outputs). With GST 2.0, the rates are broadly:
 

• Exempt / 0% (for many essentials)
   
• 5% (for many consumer goods and day-to-day items)
   
• 18% (a broader standard rate for goods and services that don’t qualify lower)
   
• 40% (for luxury, sin, and “vice” goods)
   

This rationalisation is intended to reduce litigation, ease classification disputes, and streamline compliance burdens for businesses, especially MSMEs. The RBI bulletin emphasizes that the “landmark GST reforms should progressively result in a sustained positive impact through significant gains in ease of doing business, lower retail prices and strengthening of consumption growth drivers.”

However, simplification comes with challenges. Some sectors fear compressed margins; others point out that not every input–output mismatch gets resolved, and the 40% slab introduces its own complexity in classification.

Macroeconomic Outlook: Growth, Inflation, and External Sector

Growth Trajectory

In its September 2025 bulletin, the RBI notes that India’s first quarter of FY 2025–26 delivered a five-quarter high in GDP growth, propelled by domestic demand. High-frequency indicators in August showed manufacturing and services activity nearing decade highs, reaffirming the strength of internal demand.

With lower taxes and improved consumer sentiment, the GST reforms are expected to sustain, or even amplify, this momentum in the second half of the year. The RBI suggests that the reforms will deepen the consumption engine, reinforcing a virtuous cycle of spending, investment, and production.

Inflation, Food Prices and Input Costs

One of the risks in tax reduction is that it may spur inflation or reduce revenue. But RBI observes that headline (CPI) inflation, though edging up, has remained below its upper tolerance threshold for seven consecutive months.

Agricultural or food prices remain a wildcard; RBI flags that while cereals have seen price increases, vegetables like tomatoes have softened, partly mitigating inflation pressure.

In addition, system liquidity is in surplus, enabling monetary policy transmission. This liquidity cushion helps absorb shocks from input cost rises and supports smoother credit conditions.

External Sector and Trade Resilience

Despite the imposition of 50% U.S. tariffs on Indian exports, the RBI points out that India’s external sector has remained “extraordinarily robust.” Nearly 45% of exports to the U.S. (e.g. pharmaceuticals, smartphones) are exempt from the tariffs, cushioning the blow.

In April–August 2025, merchandise exports remained stable, and FDI inflows rose to a 38-month high. India’s current account deficit has moderated, helped by strong services exports and remittances.

This external resilience gives the economy more room to absorb internal reforms without threatening macro stability.

State Finances, GST Buoyancy, and Redistribution

One major concern is how the reform affects state revenues. Under the earlier regime, states collected SGST and also received IGST settlements and devolution. The shift to simpler slabs changes the revenue mix, raising fears of shortfalls.

Estimations and Potential Gains

The government estimates that the reform may entail a revenue loss in the order of ₹48,000 crore (net) after accounting for higher rates on luxury goods. The Wikipedia page on GST 2.0 also notes that input cost mismatches may reduce the benefit for some sectors.

On the other hand, an SBI report expects many states will emerge as “net gainers” from rate rationalisation. It projects that state revenues (including devolution) may cross ₹14.10 lakh crore in the current financial year.

Still, not all states are sanguine. Kerala’s finance minister cautioned of a substantive revenue slump, estimating a drop between ₹50,000 crore and ₹2 lakh crore depending on how the past structures are adjusted.

Former West Bengal finance minister Amit Mitra even warned of a ₹1 lakh crore revenue loss nationally, citing mismatches in input-output rates (e.g. tax on inputs being higher than output in medical devices).

Table: Projected Impact on State Revenue

Below is a comparative table summarising selected states’ reactiveness to the GST change, their risk estimates, and likely adjustments.

(Note: The figures are indicative and based on media statements and reports as of September 2025.)
 

After reviewing the data, it appears that while individual states fear revenue erosion, the broader reform may enhance long-term buoyancy through better compliance and lower tax evasion.

Sectoral and Distributional Effects

Beyond macro aggregates, the reform’s real test is in how it plays out across sectors and for households.

MSMEs and Small Traders

Smaller firms are expected to benefit from reduced compliance burden, fewer slabs to manage, simpler classification, faster refunds, and less litigation. The RBI explicitly mentions that MSMEs and startups stand to gain from procedural ease and fewer delays.

However, the transition phase may be difficult for entities with legacy inventory taxed under older slabs. Adjustments, reclassification, and software adaptation will impose one-time costs.

Consumers & Demand Boost

Lower GST rates on many consumer goods are expected to translate into lower retail prices, which in turn can lift consumption. The RBI bulletin anticipates that the reforms will progressively strengthen consumption growth drivers.

Media reporting confirms this; for example, Reuters notes that everyday items like toothpaste and air conditioners are expected to become cheaper under the new regime.

Additionally, the government expects that combined with income tax reliefs, households may save or spend up to ₹2.5 lakh crore this year.

Risks: Pass-through and Distribution

One risk is that firms might not fully pass on tax savings to consumers, especially in sectors with weak competition or high fixed costs. Some state ministers fear price reductions may be withheld for higher margins.

Also, the gains might be skewed toward more urban or better-informed consumers. Rural or remote markets may see delayed price adjustments.

Risks, Headwinds, and Mitigations

While the outlook is broadly positive, several risks merit attention:
 

• Revenue shortfalls for states: As already seen in voices of dissent from Kerala and West Bengal, states may demand compensation or reversion.
   
• Input–output mismatches: Despite slab rationalisation, some sectors may still suffer from inverted duty issues, particularly in capital goods or niche manufacturing.
   
• Delayed pass-through: Markets may delay reflecting tax reductions, reducing the intended boost to consumption.
   
• Global volatility: External shocks, geopolitical tensions, commodity price swings, or worsening global trade, could blunt domestic gains.
   
• Transition costs: Businesses require time and resources to adjust, reprogram software, reclassify SKUs, retrain staff, and manage inventory transitions.
   

To mitigate, the central government has indicated that GST reforms will continue iteratively (per statements by Prime Minister Modi) and that there will be easier registration, fewer disputes, faster refunds, and continued dialogue with states. 

Conclusion

India’s shift to GST 2.0, with a leaner rate structure of 0%, 5%, 18%, and 40% — is a bold step toward tax simplification, greater compliance, and consumption-led growth. The RBI’s September 2025 bulletin is optimistic, seeing the reforms as a catalyst for ease of doing business, lower retail prices, and a stronger growth trajectory backed by domestic demand.

But success will depend on execution. States must be assured of revenue stability, consumers must feel benefits through timely price cuts, and businesses must smoothly manage the transition. If these elements align, GST 2.0 can become a growth lever rather than just a tax reform.

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