GST 2.0: A Double-Edged Sword for Consumers and Businesses
GST 2.0: A Major Tax Reform
The introduction of GST 2.0 is being hailed as a significant reform in the tax landscape of the country. Implemented on September 22, 2025, this new system aims to reduce prices and stimulate market demand. The government has eliminated the 12% tax slab and brought many essential items under a 5% tax rate. While this is positive news for the average consumer, the scenario is quite different for business owners. This change has exacerbated a technical issue that has been troubling the industry, known in economic terms as the 'inverted duty structure.'
Understanding the Inverted Duty Structure
The core of the problem for businesses lies in the significant disparity between input and output tax rates. A simple example from the bicycle industry illustrates this. Suppose a manufacturer purchases steel, rubber, and other components to produce a bicycle, incurring an 18% GST on these inputs. However, when the finished bicycle is sold, it is taxed at only 5%. This means the business has already paid more tax upfront, which they must reclaim from the government as 'input tax credit.'
Impact Across Various Sectors
Officials from both the government and the industry indicate that this issue has become more pronounced. Sectors such as food processing, electric vehicles, and textiles are among the hardest hit. Packaged food items and stationery are taxed at 5%, yet essential services like aluminum foil packaging and advertising still incur an 18% tax. The medical sector faces similar challenges, particularly with vaccines. In areas where the cost of production heavily relies on services or capital goods, this tax mismatch is adversely affecting company profits and operations.
Cash Flow Crisis for Small Businesses
The most significant impact of this inverted tax structure is felt by small and medium enterprises. Their working capital gets trapped in the system. Theoretically, businesses should receive refunds for the excess tax paid. However, the reality is that lengthy paperwork and the financial constraints of states often delay these refunds for months. Without any interest, the money remains stuck in government coffers, creating a severe cash flow crisis for businesses trying to purchase raw materials and manage daily operations.
Have Fundamental Tax Principles Been Overlooked?
When the GST Council approved rate rationalization on September 3, 2025, the primary focus was to boost market consumption. Government officials believe that in the past, when tax rates were adjusted, special attention was given to addressing the inverted duty structure. However, in GST 2.0, the foundational design principles of taxation have not been fully implemented. While consumer goods have been placed in lower tax slabs, their raw materials remain in higher slabs. Now, the government faces a significant challenge: how to free up the trapped capital of businesses while maintaining demand.