Tax experts welcome proposed two-tier GST, but caution on inverted duty structure

Some experts warned that structural problems could blunt the benefits of rationalisation 

Tax experts have broadly welcomed the Centre’s proposal for a two-tier GST rate structure, saying it will simplify the system and boost consumption while cautioning that critical issues such as inverted duty structure need to be addressed for the reform to be fully effective. They also noted that the changes are unlikely to materially impact government revenues.

Pratik Jain, Partner at Price Waterhouse & Co LLP, said the GoM’s recommendations, while in line with expectations, are significant.

“This will simplify the tax structure, reduce the disputes on classification of products and also boost consumption. Since more than 70 per cent GST collections come from 18 per cent slab (which is not proposed to be changed in general) the revenue impact of GST cuts may be limited, particularly because reduced prices will also spur the demand,” he said.

But Jain cautioned that given the speed with which reforms are moving, industry will need to gear up quickly to meet a steep transition timeline.

Others warned that structural problems could blunt the benefits of rationalisation.

Mahesh Jaising, Partner with Deloitte India, pointed to the long-pending issue of duty inversion, where inputs are taxed at a higher rate than final products.

“With rate changes, industry awaits clarity and guidelines on areas of passing on the benefits. Industry does look forward to addressing duty inversion refund process comprehensively too and this has been identified by the Finance Ministry (in the press release) as a key structural issue,” he said.

Transitional measures

Saurabh Agarwal, Tax Partner at EY India, said inverted duty structure may even worsen under the new slabs if not carefully handled.

“The most immediate effect would be inverted duty structure which may arise on account of movement to lower tax slabs. If left unresolved from a supply chain perspective, it could create working capital strain and prevent the benefits of lower rates from reaching consumers,” he said.

Agarwal added that transitional measures to protect distributors and branches will be critical, along with a strong anti-profiteering framework to ensure tax reductions are passed on.

Tangible relief

From a broader perspective, Manoj Mishra, Partner with Grant Thornton Bharat LLP, said the move will provide tangible relief for households and MSMEs.

“The proposed shift of most items from 12 per cent slab to 5 per cent and from 28 per cent slab to 18 per cent promises tangible relief for households and MSMEs while aligning with the government’s broader agenda of growth and financial inclusion,” he said.

At the same time, he warned: “Careful calibration will be essential to preserve revenue neutrality and avoid inflationary pressures. With the Council now set to take a final call in the upcoming meeting, the GoM’s recommendations reflect both pragmatism and ambition in shaping the next phase of GST reform.”

The Centre’s plan follows Prime Minister Narendra Modi’s Independence Day announcement of “second generation” GST reforms. It proposes cutting the four basic slabs of 5, 12, 18 and 28 per cent to two main rates of 5 and 18 per cent, retaining the special 0.25 per cent and 3 per cent levies, and moving a handful of items from the 28 per cent slab into a new 40 per cent category, the legal ceiling under GST law.

Published on August 21, 2025