GST 2.0: Journey and Impact on Economic Growth

Abstract

India's destination-based indirect tax system, known as the Goods and Services Tax (GST), was put in place to streamline the country's tax system. It lowers the overall tax burden and increases tax system transparency by concentrating on the taxation of goods and services and replacing a number of indirect taxes. The GST went into force on July 1, 2017. This study examines the country's more efficient and organized tax system. The future of the GST in India is examined in this study, especially in light of the implementation of GST 2.0 and its outreach programs for MSMEs and traders. It assesses the impact of GST Network (GSTN) updates on tax compliance and Input Tax Credit (ITC) utilization, as well as improvements in the GST return filing system. The seven pillars of next-generation GST reforms and their anticipated impact on various economic sectors are also covered in the study. The study also examines the Union Budget 2026's goal of achieving Viksit Bharat by striking a balance between inclusivity and economic growth. It covers the government's fiscal roadmap, policy changes, and transparency initiatives, it also emphasizes the importance of fiscal federalism. Secondary data gathered from reports, policy documents, and related sources serve as the study's primary foundation.  

Key Words: GST Reforms 2.0, GDP Growth, Fiscal Federalism, Economic Growth, GST Council

1. Introduction

In India, the Goods and Services Tax (GST) is an indirect tax on the sale of goods and services. It is a tax that is charged at every stage of the supply chain where value is added, and it is a destination-based tax. GST replaced several indirect taxes, including VAT, excise duty, service tax, and other state and central taxes. This made the tax system more unified. The main goal of GST is to make the tax system easier to understand, reduce the amount of tax people must pay, and make it more open.

The Government of India runs the Goods and Services Tax (GST) through the Central Board of Indirect Taxes and Customs (CBIC). The GST Council was set up to make sure that the central and state governments work together and follow the rules. The Constitution (101st Amendment) Act, 2016, which changed the Constitution of India to allow for the implementation of GST, created the GST Council on September 15, 2016. This change to the Constitution made it possible to set up a single indirect tax system for the whole country. The highest decision-making body for GST in India is the GST Council. It is in charge of overseeing, regulating, and upholding the nation's GST system. All states and union territories are represented on the council, which is chaired by the Union Finance Minister. It offers suggestions on GST-related tax rates, exemptions, threshold limits, and policy modifications. The GST Council strengthens fiscal federalism and supports the seamless operation of GST in India's democratic framework by ensuring a transparent and balanced tax system through this cooperative mechanism.

1.1 Overview of Indian Indirect Tax System

India had a complicated system of several indirect taxes before the introduction of the Goods and Services Tax (GST). The federal and state governments imposed different taxes, including VAT, excise duty, service tax, and others. Customers, producers, and vendors were all severely impacted by this. Confusion, complexity, and higher overall tax rates on goods and services were frequently caused by the existence of multiple taxes. On July 1, 2017, the Indian government implemented the Goods and Services Tax (GST) to streamline the taxation system. Numerous indirect taxes were superseded by GST, which created a single tax system for the entire nation. For the supply of goods and services across India, a single tax structure was put in place in place of several taxes.

Different tax slabs were introduced under the GST to categorize goods and services according to their significance and nature. Every product category has its own tax rate. This organized system guarantees that necessities are taxed at lower rates while luxury goods are taxed at higher rates, contributing to the preservation of tax equity. All things considered, the introduction of GST has made the tax system more transparent and effective for both buyers and sellers, simplified the tax structure, and decreased confusion.

Under the Goods and Services Tax (GST) system, different tax slabs are applied to goods and services on the basis of categories and importance. The Goods and Services Tax system has mainly four standard tax slabs: 5%, 12%, 18%, and 28%. Goods like basic food items are usually charged at a lower rate of 5%, while other standard goods and services are charged at 12% or 18%. Luxury goods are charged at the maximum rate of 28%.

1.2 New Tax Rates/Slab Rate

India has simplified its GST framework to a two-tier tax rate framework, which is applicable with effect from September 22, 2025. This has been implemented following a meeting of the GST Council, which was its 56th meeting. The GST framework has been simplified to GST 2.0. The GST 2.0 framework has been implemented by incorporating two tax slabs, namely 5% and 18%. The 12% and 28% tax slabs have been removed. The essential items, like fresh produce, are included in the nil-rated category. Individual life and health insurance premiums have also been included in the nil-rated category. The 5% merit rate has been incorporated to cover items like packaged food items, basic toiletries, and life-saving medicines. The 18% standard rate has been incorporated to cover all items. Items like TVs, ACs, small cars, cement, etc., which were previously included in the 28% tax slab, are now included in the 18% tax slab. The GST Council has also introduced a 40% tax slab for items like luxury cars, tobacco products, aerated drinks, etc. This has been incorporated to replace items that were previously included in the 28% tax slab, along with cess.

1. Review of Literature

Dr. Devarajappa S N(2025): This study reveals the major impact of GST on the health sector and the benefits for the common people on account of GST reforms.

N Nirmala Kumari(2025): GST 2.0: A Transformational Step Towards Simplified Taxation and Economic Efficiency in India:  This study reveals that the difference between GST1.0 and GST 2.0 & by simplifying tax slabs and streamlining refund procedures, GST 2.0 seeks to simplify the tax system. Additionally, it makes tax filing simpler by utilizing digital systems. It can boost business growth, assist MSMEs, and enhance tax compliance if properly implemented.

Manish Nellaikumar Pandaram(2025). From Complexity to Clarity: Assessing the Legal and Economic Dimensions of GST 2.0 Reforms: This paper provides a comprehensive evaluation of GST 2.0 by examining its intersection with India's constitutional framework and federalist dynamics. It effectively balances legal theory with an economic impact assessment across vital sectors like manufacturing, agriculture, and exports.

SHUBHAM BHARDWAJ (2025): GST 2.0 REFORMS AND THE INDIAN MARKET: A STUDY: This study reveals that GST 2.0 reforms affect government revenue, business margins, inflation, and consumption. It also highlights potential advantages and disadvantages for various industries and talks about implementation difficulties. The study comes to the conclusion that if GST 2.0 is implemented with appropriate compliance systems and explicit policies, it can boost demand, lower costs, and support economic formalization.

Prof. Nilanjan Banik: This study reveals the historical perspective (vision, mission), and the current situation of the taxation system. This study gives information about cess, architecture reforms, and macro effects, and it reveals the social impact of distributors.

1. Objectives of the Study

• To understand the concept of GST 2.0.

• To analyze the impact of GST on India’s Economic growth.

1. Need for Study

The Indian indirect tax system brought a major revolution in 2017 by adopting GST throughout the nation. This phase has seen success in a unified tax system, but also faced many challenges, such as revenue shortfall and compliance burden. To overcome the same, GST 2.0 was introduced. The impact of GST 2.0 is not yet fully understood. Without systematic study, it is impossible to understand. This gap creates a need to study the GST 2.0 and its impact on economic growth. 

1. Methodology

This paper is based on secondary data, mainly from previous literature, industry publications, government reports, journals, and the Ministry of Publication. A descriptive data analysis has been done to find out the GST 2.0 and its impact on economic growth

1. GST 2.0

GST 2.0 is the updated goods and services tax reform launched on September 22, 2025. It simplifies the tax slabs into 5%, 18%, and 40% to reduce complexity and improve compliance. It lowers the input costs, simplifies compliance, speeds up refunds, and creates stronger domestic and export market opportunities. Under GST 2.0, all types of businesses like MSMEs, traders, Automobiles, consumer durables, agriculture, textiles, and construction materials are expected to see the biggest growth. GST 2.0 is not merely a tax reform; it is a growth strategy for businesses. With GST 2.0, businesses are provided with a great opportunity to grow from 2025 and beyond. Government Schemes to Boost GST 2.0 Business Growth. To take full advantage of GST 2.0, business entrepreneurs can partner with government schemes such as PLI, Startup India, CGTMSE, and PMEGP.

6.1 GSTN

Goods and Services Tax Network (GSTN) has developed an “Indirect Taxation platform for GST,” which facilitates taxpayers in India to “prepare and file their returns, make payments of their indirect tax liabilities, and perform other compliances.” GSTN provides IT infrastructure and services to Central and State Governments, taxpayers, and other stakeholders to facilitate the implementation of the Goods and Services Tax (GST) in India.In the new GST portal Validations (2026), the GST portal has robust validation mechanisms. 

Mandatory HSN code on GST portal: The GSTN has been introduced, requiring businesses to enter 4 or 6-digit HSN codes in GSTR-1 based on their turnovers enables the withdrawal of GST registration applications, and ensuring that the Invoice Management system updates for better tracking of debit/credit notes and invoice reconciliation.

6.2 GST 2.0 Impacts on MEMEs:

MSMEs (Micro, Small, Medium, Enterprises) are considered the backbone of the Indian Economy after agriculture. It contributes 30% of India's GDP. MSMEs are small businesses, which are encouraged to produce goods within a country and export the goods to other countries. The MSMEs invest less but earn more. It encourages the production of domestic products, and it emphasizes that there is no more rely on other countries' goods.

GST 2.0 enables easier business. The rate structure was simplified, which helps MSMEs understand tax rates easily and reduce classification disputes. After the implementation of GST 2.0, businesses can reduce the number of inspections and notices for small businesses. And it enables self-certification audit model for micro units. From November 2025, about 90% of GST refunds are processed automatically through a risk-based system. This helps to improve cash flow for MSMEs that are involved in export or an inverted duty structure. Regarding this, the GST Appellate Tribunal has been introduced to resolve tax disputes faster, which helps small businesses handle tax litigation more easily.

Currently, MSMEs' GDP contribution is 30%. Under the Viksit Bharat 2047 vision, India aims to become a $ 30 trillion economy by 2047. Therefore, MSMEs are expected to increase their contribution to about 35-40% of GDP in the future. For this, it aims to increase exports, and GST 2.0 will help to achieve MSMEs aim by reducing the compliance burden and speeding up refunds.

6.3 GST 2.0 Opportunities

• Lower Costs & Market Growth: Lowering costs helps with the smooth flow of cash. Increases demand in the domestic market. Helps in the growth of the consumer market. Increases economic growth. Help businesses grow as the market is now more affordable.

• Export Potential & Market Expansion: High export potential in sectors like electronics, pharma, auto components, etc. Help businesses grow in the market.

• Government Support & Business Growth: Access to schemes like PLI, Startup India, CGTMSE. Help businesses grow as the market is now well-managed.

  (source: https://share.google/Z1x11cVxJ3QvdTe9y)

6.4 Seven Pillars of GST

To achieve future goals, GST plays a crucial role. The new reforms are built upon seven key areas, or a pillar. Each pillar focuses on different aspects of the system, focusing on all areas at the same time may help to achieve a $30 trillion economy.

Seven Pillars of Next-Gen GST Reforms

(source:  https://share.google/TqA7CNeR55Dk17YVo)

 6.5 Union Budget 2026, Viksit Bharat Vision & Impact On Economic Growth 

(Source: https://share.google/Z1x11cVxJ3QvdTe9y)

Finance Minister Nirmala Sitharaman presented the Union Budget 2026 on 1st February, which is Nirmala Sitharaman's ninth consecutive budget address. This year's budget mainly focuses on Viksit Bharat (2047). This year's budget mainly focuses on the following sectors:

This year's budget is a fiscal deficit budget. The non debt receipt and the total expenditure are estimated as 36.5 lakh crore and 53.5 lakh crore, respectively. The centre’s net tax receipts are estimated at 28.7 lakh crore.

• Infrastructure & Growth

Strengthening the importance of public investment as a major contributor to economic growth, the Budget also gives a significant boost to infrastructure development. The expenditure on capital formation is proposed to increase by ~9% from FY 2025-26 (Budget Estimates) to ₹12.2 lakh crore in FY 2026-27. The expenditure on capital formation has increased from ₹2 lakh crore in FY 2014-15. This reflects the focus on growth via infrastructure development, mobilization of private investments, and building productive potential. It majorly focuses on roads, railways, ports, housing, and job creation.

• Agriculture& Rural India

In the 2026 budget, the Agriculture and Farmers welfare has been allocated rupees 1.30 lakh crore, up from 1.27 lakh crore from last year. The budget of the rural development ministry has increased by 21% this year. It focuses on Agri-technology, litigation, rural employment, and the Jal Jeevan Mission. This year's budget was framed keeping in mind villages, the poor, farmers, youth, and women.

• Economy & Vision

Under this, mainly three Kartavyas are introduced, which are as follows:

Kartavya 1: Accelerating and Sustaining Economic Growth. ...

Kartavya 2: Fulfilling Aspirations and Building Capacity. ...

Kartavya 3: Sabka Saath, Sabka Vikas through Targeted Inclusion.

• Yuva Shakti 

The Union Budget 2026-27, also known as the Yuva Shakti Driven Budget, focuses on the power of the youth as the engine for the journey to becoming a developed nation (Viksit Bharat). It lays emphasis on the need to accelerate the growth of the Indian economy, skill development, and employment opportunities through investment in the field of education, innovation, and entrepreneurship. It also focuses on the development of sectors such as the manufacturing industry, infrastructure, and technology, which are necessary for the development of the Indian economy, keeping in mind the development of all sections of society.

• Lakhpat Didi Scheme  

This is a scheme only for women. The Lakhpati Didi Scheme, launched by the Government of India, intends to enable women in rural areas, belonging to Self-Help Groups, to achieve an annual income of at least 1 lakh rupees through sustainable livelihood options. The program emphasizes skill development, financial literacy, and encouraging micro-enterprises in sectors such as agriculture, animal husbandry, and small businesses. The objective of the Lakhpati Didi Scheme is to create 6 crores of ‘Lakhpati Didis’ through training, financial assistance, and digital monitoring of the progress achieved. Eligible members of Self-Help Groups, as per the Deendayal Antyodaya Yojana – National Rural Livelihoods Mission (DAY-NRLM), may apply through local bodies and gain the necessary support to achieve financial independence.

1.  Challenges:

Implementation of GST 2.0 is facing major challenges due to the complexity of compliance and the difficulties MSMEs face in adapting to modern technological systems and automation that may be introduced in the GST reforms, due to a lack of technical know-how. It may also be challenging for them to comply with the requirements and updates in GSTN due to a lack of awareness and training in this regard. Moreover, it may be costly for them to keep records in digital form and may also affect their cash flow due to delays in input tax credit and refunds. In addition to this, increased digitalization may lead to cybercrime challenges, and issues in GSTN may affect ease of business due to continuous updates and changes in policies.

1. Findings

According to this research, GST has made a significant impact on the economy by increasing transparency, making the tax system simpler, and encouraging businesses to formalize. The Union Budget 2026 has given more emphasis to various sectors with the aim of realizing the “Vision of Viksit Bharat.” The research indicates that MSMEs have a significant role in realizing the future economic targets because they significantly contribute to employment and economic development. The research describes the new changes in the Goods and Services Tax Network (GSTN), which assist in minimizing irregularities and automatically calculating the GST rates and tax amounts.

1. Suggestions

This project is based on GST 2.0 and the seven pillars of reform. The GST initiatives for the next generation should include the adoption of AI-driven GSTN audits in real time to achieve maximum Input Tax Credit (ITC) matching and reduce fraud cases drastically, as highlighted by the research findings. The next generation GST initiatives should also include the enhancement of MSME engagement by integrating AI-driven Simplified Compliance tools into Accounting Software, thus moving in line with the Viksit Bharat vision for the year 2047. In addition, the restructuring of the tax structure by moving away from the multi-rate system and adopting a unified structure while respecting the principles of fiscal federalism will boost the economy and increase transparency, as this source cites that a simplified tax structure increases compliance.

Conclusion

The evolution of the Goods and Services Tax (GST), a landmark move toward the establishment of a transparent tax system in the country, is a major achievement. The introduction of GST 2.0 has further enhanced the tax system through the Goods and Services Tax Network (GSTN), which has improved the tax return filing system. These developments have a major impact on the growth of Micro, Small, and Medium-sized Enterprises (MSMEs), as the tax system has become more streamlined.

In addition, the seven pillars of GST reforms and the application of the Fiscal Federalism model promote the spirit of cooperation between the central government and the state governments through the establishment of the GST Council. In line with the objectives of the Union Budget 2026, the GST reforms have a major impact on the economic growth of the country.

To conclude, the GST reforms, the support provided to MSMEs, the technological advancements in the GSTN, and the spirit of cooperation between the central government and the state governments through the application of the Fiscal Federalism model will play a vital role in achieving the long-term vision of Viksit Bharat 2047.

Reference:

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2. GST Updates 2026: https://share.google/kHnJDtdOrU6tVSYqh

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6. https://lakhpatididi.gov.in/. Lakhpat Didi Scheme 

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