The GST 2.0 overhaul, aimed at simplifying India’s tax structure by eliminating the 12 per cent slab and shifting many goods into the 5 per cent bracket, is creating unintended stress across key industries, with officials and industry players warning of a worsening inverted duty structure and mounting liquidity challenges.
The revised tax regime, approved by the GST Council in September 2025 and implemented later that month, prioritised demand stimulation through lower rates. However, this shift has widened the gap between input and output taxes in several sectors, particularly those reliant on services and capital-intensive inputs.
Under the new structure, while finished goods in sectors such as textiles, food processing and electric vehicles are now taxed at 5 per cent, many input services—including packaging, logistics, advertising and other operational costs—continue to attract GST rates of around 18 per cent. This mismatch has intensified the inverted duty structure, where taxes paid on inputs exceed those on final products.
Officials note that the issue is especially pronounced in industries where services form a substantial portion of total costs. In food processing, for instance, finished products have moved to the lower tax slab, but key inputs like packaging materials and services remain in higher brackets. Similarly, the textiles sector continues to face structural imbalances, with most finished goods taxed at 5 per cent while inputs and services are taxed significantly higher.
The problem extends across multiple industries. In electric vehicle manufacturing, high input taxes on components and services contrast sharply with reduced output rates. Even in segments like packaged foods and consumer goods, inputs such as aluminium foil and specialised materials attract higher taxes, leading to accumulation of input tax credits.
This imbalance forces companies to pay more tax upfront than they can offset through sales. The excess tax paid is meant to be refunded, but delays in the refund process have compounded the issue. Industry sources indicate that procedural bottlenecks and fiscal pressures at the state level often slow down refunds, leaving working capital locked for extended periods.
For small and medium enterprises, the impact has been particularly severe. With funds tied up in pending refunds, many businesses face daily cash flow constraints, limiting their ability to invest, expand or even sustain operations smoothly.
A commonly cited example is from the bicycle industry, where manufacturers pay 18 per cent GST on raw materials such as steel and rubber but sell finished products at 5 per cent. The resulting credit accumulation requires refunds that are often delayed, effectively leaving businesses financing the tax system without returns.
Experts say the current situation reflects a shift in policy focus under GST 2.0. While earlier rate rationalisation efforts attempted to address structural inefficiencies like inversion, the latest reforms have leaned more towards boosting consumption and simplifying rate slabs.
As a result, while consumers may benefit from lower prices, industries are grappling with tax design mismatches that disrupt financial cycles. Stakeholders are now calling for corrective measures, including faster refund mechanisms and a rebalancing of input-output tax rates, to restore equilibrium in the system and ease pressure on businesses.