A few days ago, the Government released a notification that detailed out the new tax rates for different products and services under GST 2.0. There was a slew of good news. In the case of many products, the rates were down. The sin rate of 40 per cent, the highest slab, was restricted to a few items. According to a trade expert, the exercise represents the largest GST rationalisation since 2017. It lowers the tax on essentials, simplifies the structure, and results in institutional reforms. It focuses on “relief for the common man, support for farmers and MSMEs, and boost for healthcare,” while ensuring “revenue stability via cess and coal-rate hike.”
As usual, there are a few sticking points and irritants. In several cases, where the rate is either zero per cent or five per cent, there is no input tax credit, or refund of taxes paid on inputs and intermediaries. The rationale is simple: If a maker or seller pays zero tax or a minimal five per cent on the finished product, there is no need to compensate for the taxes on inputs. But this reduces the maker-seller’s ability to pass on the benefits. For instance, in the case of health insurance policies, where there is zero tax now, insurers will be cagey to reduce premiums too much since they will not get the refunds due to input tax credit on commissions and other expenses.
In some cases, the inverted tax structure continues. This implies that inputs attract higher tax rates compared to the final products. The difference is credited under a separate head, and most of it is refunded over time, which leads to delays. According to Arun Goyal, who brings out regular detailed publications on indirect taxes, including GST, this is “cumbersome and time-consuming.” One needs to add that the Government realises this and, under GST 2.0, the tax authorities will initiate “90 per cent provisional refunds under inverted duty correction system.” But this will be strictly monitored to ensure that it does not lead to excess and unfair refunds.
Goyal feels that while consumers will be happy, the industry remains worried. “Those manufacturing textile fibres and yarns will suffer a five per cent GST but their buyers of final products will suffer 18 per cent on petrochemicals. The huge input tax credit on the difference will stand in their books (of accounts) with little chance of set-off (against other payments in the future),” he explains. Large, vertically-integrated businesses may not wish to buy the inputs at five per cent, when the final products attract 18 per cent, which will result in a huge tax mismatch. This will be especially true if the new provisional refund mechanism is not efficient. This will impact the independent, non-integrated producers of the inputs.
One of the main reasons for the above scenario is that the Government was apprehensive about revenue shortfalls due to lower tax rates. To maintain near-revenue neutrality, or a reduction of only Rs 48,000 crore without accounting for volume buoyancy, it had to keep these mechanisms intact.
The fact is that the Government faces possible shortfalls in direct tax collections. The figures for April 1-September 17, 2025, indicate that while the net revenues increased by more than nine per cent, this was largely due to higher advance taxes by companies, and lower refunds to individuals. If refunds were at the same level as last year during the same period, the gross collections would be higher by just over three per cent.
The Government has clarified that lower refunds are due to higher scrutiny of the income tax returns filed by individuals. This is especially so for the high taxpayers, who have filed under the old tax regime.
The authorities feel that the refund claims under several heads are exaggerated, and have asked the taxpayers to provide more details, or claim lower refunds. A new monitoring mechanism is now in place to pinpoint irregular tax returns. Hence, the refund exercise will take time. Thus, the payments will be delayed, compared to the earlier years when they came within 24 hours. Higher scrutiny is part of other taxes too, especially GST.
In the past few weeks, the authorities have announced cases with allegations of large-scale GST evasion through false and inflated invoices. The amounts are staggering in thousands of crores of rupees.
Experts feel that such monitoring will intensify after GST 2.0, although the incentive to evade and avoid is lower due to most items being in lower slabs. The real cases will relate to items in the sin-tax category.
This may prove to be one of the reasons for the possible delays or problems in refunds of, or setting-off, taxes under the GST’s inverted duty structure mentioned earlier. Issues in both direct and indirect taxes may force the Government to find ways to boost revenues, especially if sales volumes fail to pick up during the forthcoming festival season, and in the second half of the year.
