The GST 2.0 reforms sought to simplify rates by scrapping the 12 percent slab and moving many goods to the 5 per cent bracket, but officials say it has worsened inverted duty structures in sectors such as textiles, food processing and electric vehicles, locking up working capital and squeezing businesses, government and industry officials said.
In several sectors, the inverted duty structure has worsened after GST 2.0, with the issue arising because taxes on inputs are higher than those on the final product, two government officials said.
“This has widened the gap between input and output tax rates, particularly in sectors where services form a significant part of the cost structure. Food and food processing, electric vehicles and other sectors that are heavily dependent on services or capital goods are among the most impacted,” one of the officials said, requesting anonymity.
Following the rationalisation, input services continue to be taxed at around 18 percent in several sectors, while output rates in many sectors have been reduced to 5 percent.
This mismatch is most evident in sectors where services account for a significant share of costs.
“Food and food processing, electric vehicles and other sectors that are heavily dependent on services or capital goods are among the most impacted,” the official said. In food processing, for instance, “the inversion has become more pronounced after finished goods were moved from 12 percent to 5 percent GST, while key inputs like packaging, advertising and other services continue to be taxed at 18 percent,” an industry official said.
The issue cuts across industries.
Textiles, long among the worst affected, continue to operate with most finished goods taxed at 5 percent, while key inputs and services remain at 18 percent.
“This creates an inherent inversion and results in accumulation of input tax credit,” a second industry source said. Vaccines present a similar case: final products are taxed at 5 percent, but specialised inputs, chemicals and packaging fall under higher tax slabs.
Even in packaged food, the final product is taxed at 5 percent, but inputs like aluminium foil used for packaging are taxed at 18 percent.
“So, the mismatch continues there as well. The same pattern is visible across several consumer goods, including stationery items, where finished products have been reduced but inputs remain in the higher tax bracket,” a second official explained.
A third industry source illustrated the issue with a simple example from the bicycle industry: a manufacturer may pay 18 percent GST on raw materials such as steel, rubber and components, but sell the final bicycle at 5 percent GST. This leaves excess tax paid upfront, which has to be claimed as a refund. In practice, however, these refunds are often delayed, meaning the manufacturer’s money remains stuck with the government for months, earning no return.
For India’s smaller businesses, this has resulted in daily financial strain.
Companies pay more GST upfront than they can recover through sales, leading to a build-up of input tax credit that must be claimed as refunds.
In practice, however, these refunds are often delayed due to procedural hurdles and strained state finances, leaving funds stuck for months and tightening liquidity, especially for smaller manufacturers, the third source said.
Under GST 2.0, the priority moved toward stimulating demand rather than correcting inversions.
“The broader issue is that GST 2.0 focused on boosting demand by reducing rates, but tax principles were not fully factored in. Earlier, rate rationalisation was done keeping inversion in mind, but this time the focus was more on commodities and consumption rather than the tax structure,” the second official said.
That means final goods that were earlier taxed at 12 percent or 18 percent have been brought down to 5 percent, while their raw materials continue to be taxed at 18 percent, the official said, adding that “tax design principles were not fully aligned.”
The GST 2.0 rate rationalisation, approved by the GST Council on September 3, 2025 and implemented from September 22, 2025, marked one of the biggest overhauls of the goods and services tax since its launch.
