Lower GST Rates to Ease Tax Burdens, Empower MSMEs, and Accelerate Formalisation: Report

The government's announcement of GST 2.0 will not only ease tax burden on households, empower MSMEs, and accelerate formalisation, but also bring India closer to the dream of a single tax regime, a report said.

The GST overhaul will nearly triple the share of items taxed at 5%, rising from 54 consumption categories to 149 categories under GST 2.0, FICCI's Committee Against Smuggling and Counterfeiting Activities Destroying the Economy (CASCADE) said in a report.

For rural households, the share of exempt and merit goods in their consumption basket is expected to rise sharply from 56.3% to 73.5%, while for urban households, this share is likely to increase from 50.5% to 66.2%, it said.

"As a result, effective GST incidence for rural families falls from 6.03% to 4.27%, while for urban households it reduces from 6.38% to 4.38%. This means more disposable income in the hands of consumers, which in turn will fuel discretionary spending on services, retail, and local businesses," it said.

For businesses, especially MSMEs, GST 2.0 introduces rationalised rates that address distortions caused by the inverted duty structure.

"GST introduced in 2017 transformed our taxation landscape, and now GST 2.0 builds on that foundation with simplified rate structures and greater efficiency. GST 2.0 truly embodies the vision of One Nation, One Tax," Ficci CASCADE Chairman Anil Rajput said.

The study estimates that GST 2.0 will result in a short-term revenue loss but this can be compensated by the broader consumption boost, improved compliance, and wider coverage over time.

It is to be noted that indirect tax collections have already doubled under GST 1.0, rising from Rs 11.78 lakh crore in 2018-19 to Rs 22.09 lakh crore in 2024-25.

The number of GST taxpayers has expanded from 66.5 lakh in 2017 to 1.51 crore in 2025, demonstrating that more businesses are entering the formal economy.

The report pointed out that GST 1.0's high tax rates created arbitrage opportunities that expanded illicit markets and between 2017-18 and 2022-23, illicit FMCG markets surged by over 70%, packaged foods by nearly 100%, and illicit tobacco trade crossed Rs 41,000 crore.

This thriving parallel economy disproportionately affected lower and middle-income groups while draining government revenue, it said.

Every rupee spent on legitimate goods strengthens the formal economy and builds confidence among businesses, while every rupee lost to illicit trade weakens consumer safety and public revenues, it said.

By moderating the standard slab to 18% and shifting a wide range of essentials into the 5% category, GST 2.0 reduces the price gaps that fuel smuggling and counterfeiting, it said, adding, this is expected to significantly strengthen consumer safety, protect legitimate businesses, and reinforce the formal economy.