FROM INVERTED DUTIES TO INNOVATION: INDIA’S MOVE TOWARDS GST 2.0
- Hindu College Gazette Web Team
- 11 hours ago
- 5 min read
Crux Of The Article
The 56th GST Council meeting marks the transition to GST 2.0, with a focus on implementing AI-enabled compliance systems, addressing the inverted duty structure through provisional refunds, and streamlining tax slabs. These reforms tend to align with international trade practice, simplify taxation, and ease MSME compliance.
Introduction
In 2016, through the assent of the President of India, the 101st Amendment was enacted. The country was guided towards a uniform taxation system that promotes equality within the nation, aiming to achieve a “One Nation, One Tax” policy. The primary objective was to streamline the taxation process, reduce the compliance burden, and enhance transparency in the supply chain, thereby eliminating the cascading effect of taxes. The 56th GST Council meeting held in 2025 marks a significant turning point in the field of indirect taxation. Taxpayers expect to eliminate complexity after the introduction of GST. The major outcome was the rationalization of tax slabs. A two-tier GST system was introduced by the Council, with rates of 5% and 18%, removing the previous four-tier structure, which included 5%, 12%, 18%, and 28% slabs. The Essential goods will be taxed at 5%, and the services will be taxed at 18%. A 40% GST tax has been introduced for luxury items and socially harmful products like alcohol, gutka, tobacco, and luxury vehicles.
The new proposed GST reforms promise affordability, easing the burden for consumers by reducing taxes on essential household and healthcare products. For MSMEs and small businesses, compliance complexities will be simplified, reducing disputes over product classification, given the two-tier tax slab. The Finance Minister’s call for “next-generation reforms” has raised expectations and emphasis on GST 2.0, which shall consist of a uniform tax rate across the states. Compliance systems that are AI-related and enhanced dispute resolution frameworks.
Addressing The Inverted Duty Structure
The main objective of the reform is, firstly, rationalization of the inverted duty structure, improvement of classification, simplification of approvals, and processing refunds. Since the introduction of GST, the inverted duty structure (IDS) has been a critical problem where the input tax levied on the raw material is higher than the tax levied on the final product. This especially affected small and medium-sized enterprises, as they invested money in raw materials with higher GST, even before knowing the outcome of the investment. In case the extra GST is paid by the company, they can claim it, but the process is slow and complicated, so as a result, they raise the prices for everyday products, putting all the burden to cover the cost on the customers. The businesses preferred to import finished goods instead of producing them in India, as it reduces their profit margin and claims the local product is less attractive and costly. This negates the idea of “Make in India” that encourages businesses to produce the product domestically in India.
One of the major issues that the Council aimed to tackle in the new GST reform is the IDS. To alleviate this, the reforms introduced partial or provisional refunds, allowing users to receive a portion of their refund upfront. In addition to this, the paperwork has been minimised and the rules for claiming refunds have been simplified, making the process faster and easier. Under this scheme, businesses will be able to access 90% of the refund claims upfront, similar to the arrangement for zero-rated supplies. This will reduce the pressure of cash flow and the need for businesses to turn towards the option of costly borrowing for financial operations. The process is used and validated by the system based on risk evaluation and data analysis before funds are released, which will help in determining the efficient use of funds and eliminate the possibility of fraudulent claims, minimizing the risk of error. The changes would also benefit the government in clearing the backlog of refund claims and reducing the potential litigation possibility.
To operationalize the provisional refunds, the Central Board of Indirect Taxes and Customs (CBIC) will issue directives to its field officers to provide provisional refunds under the Inverted Tax Structure Refunds framework, even before the formal amendment of Section 54(6) of the CGST Act, 2017. Initially, the scheme will be implemented through administration. The IDS mainly affects the textile, food processing, and textile which will benefit from improved liquidity, reduction in working capital blockages, and the funds will be accessed faster which will help the companies to reinvest in production and operations which results in improving competition and expansion of production, as the requirement of working capital in these sectors is high and profit margins are low.
The Roadmap For Next-Generation GST Reforms
The motive of India is to achieve a single rate GST system similar to models practiced globally, like Australia, New Zealand, and Singapore. Currently, the two-tier structure represents a move towards a uniform rate system by eliminating the complexities that persist. Anyway, adopting a single uniform rate system for goods and services can be a risk of inequity and a regressive impact, as it can impact low-income households if essentials and luxury items are taxed at the same rate. There needs to be a balance between social fairness and efficiency in policy-making to achieve this.
The next step towards shaping the GST reform for the next generation is the use of technology. Although, there has been an introduction of e-invoicing and GSTN based return filing foundation but to make it more efficient the introduction of artificial intelligence and data analytics would result in the enhancement of the whole system with innovations such as instant invoice reconciliation, fraud alert mechanism based on an algorithm, automatic verification of the returns, increase transparency as e-invoicing would create a digital footprint which will make it difficult to under report the sales or falsify credits, it would thus be possible to cut down the corruption as the compliance will be system based leaving less space for subjective assessment.
GST aims to minimize litigation, disputes among taxpayers, and courts regarding the classification of products and refund-related issues. There is a need to establish a GST Appellate Tribunal to look after all these concerns and clear the backlog by appointing specialists and judicial officers for quicker dispute resolution. Another aspect, such as tax mediation and a reliable advance ruling system, can help prevent disputes from escalating.
India needs to be consistent with the international trade norms to achieve the position of Make in India and Atmanirbhar Bharat. A predictable, simple, and transparent tax regime reduces the costs of transactions and strengthens export competitiveness. Policies that are zero-rated exports, timely settlement of input credits, and aligning with established global VAT/GST systems to boost the ease of doing business in India.
Conclusion
The 56th GST Council has marked a move towards rationalizing the tax system into a tier structure and the introduction of provisional refund to tackle the inverted duty structure, resulting in minimizing the compliance obstacle of MSMEs. The main objective is to boost indigenous products, make the essentials affordable for customers, and ease the compliance process for the businesses. India is moving towards reducing litigation, enhancing the competitiveness of exports, and aligning with global standards of trade by highlighting the importance of AI-enabled monitoring. This is the step of India towards GST 2.0. The reforms demonstrate India’s commitment to establishing a fair, efficient, simplified, and future-ready GST regime.
By Khyati Sinha
Khyati Sinha, a third-year B.A. LL.B. student at Maharashtra National Law University, Chhatrapati Sambhajinagar. Through internships, mooting, and research-driven projects, She have developed experience in legal research, drafting, and advocacy. She is particularly interested in constitutional values, regulatory frameworks, and contemporary legal challenges, and She aspires to build a career in litigation and corporate legal practice.
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