Impact of the new GST 2.0 on Purchasing Power in Different Classes of the Indian Economy

Impact Of The New GST 2.0 On Purchasing Power In Different Classes Of The Indian Economy – Analysis – Eurasia Review

Introduction

The Goods and Services Tax (GST), introduced in India in 2017, represented one of the most ambitious indirect tax reforms in the country’s history. By replacing a complex system of central and state-level taxes with a unified structure, GST aimed to streamline compliance, widen the tax base, and foster greater economic efficiency. 

However, the tax has often been criticized for its regressive tendencies, disproportionately affecting lower-income households. With the introduction of GST 2.0—a package of reforms emphasizing rationalized rate structures, expanded exemptions for essentials, and stronger compliance mechanisms—the debate has resurfaced regarding its implications for purchasing power across different socio-economic classes.

This article examines the impact of GST 2.0 on purchasing power in India, focusing on three broad income groups: the lower-income class, the middle class, and the affluent class.

GST 2.0: Key Features

GST 2.0 differs from the original framework in three important ways:

1. Rate Rationalization – Convergence of multiple tax slabs into fewer categories, reducing cascading effects and compliance burdens (Sankar, 2021).

2. Wider Exemptions for Essentials – Basic food, education services, and healthcare are increasingly zero-rated, shielding vulnerable households from inflationary pressures (Rani & Dutta, 2022).

3. Digital Compliance Mechanisms – Enhanced e-invoicing and AI-driven monitoring aim to reduce evasion and broaden the tax base, increasing fiscal capacity (Kumar, 2023).

Together, these reforms seek to balance efficiency with equity, yet their effect on household purchasing power depends heavily on income class.

Impact on Lower-Income Households

For the lower-income class, consumption baskets are dominated by essential goods such as food staples, fuel, and healthcare services. Studies show that earlier versions of GST disproportionately burdened these households because indirect taxes tend to be regressive (Rao, 2019). GST 2.0 attempts to mitigate this by exempting or zero-rating essential goods and services.

– Positive Impact: The exemption of cereals, pulses, and medicines improves disposable income for households in the bottom 40% of the distribution.

– Neutral/Negative Effects: Rising compliance costs passed down the value chain may still cause price inflation in semi-essential goods, such as clothing and transportation.

Empirical modeling suggests that the bottom quintile may experience a 2–3% improvement in real purchasing power under GST 2.0 compared to GST 1.0, though inflation in non-exempt segments could erode some gains (Maitra & Mukherjee, 2021).

Impact on the Middle Class

The middle class, which has more diversified consumption baskets including education, healthcare, durable goods, and services, experiences mixed outcomes under GST 2.0.

– Durable Goods and Services: Reduction of rates on appliances and household services increases affordability, positively affecting disposable income.

– Education and Healthcare: Continued exemption helps shield this group from inflationary pressures in human capital investments.

– Lifestyle Goods: Higher tax incidence on luxury or environmentally harmful goods (such as tobacco and fossil fuel products) may slightly raise costs for this group.

Overall, GST 2.0 aligns well with middle-class consumption priorities, with purchasing power likely improving by 3–4% in real terms due to reduced effective tax burdens and better price stability (Sharma & Bhatia, 2022).

Impact on the Affluent Class

For the affluent class, whose expenditure patterns emphasize discretionary consumption—luxury goods, travel, automobiles, and real estate—GST 2.0 is likely to have a modestly negative effect.

– Luxury and Sin Goods: Higher rates and cess continue to apply, consistent with principles of progressive taxation.

– Real Estate: Rationalized rates may encourage investment in housing, but the benefits are partly offset by compliance tightening.

– Wealth Diversification: Indirect taxes are unlikely to constrain wealth accumulation, but they may temper luxury spending.

As such, the affluent class sees marginal erosion in purchasing power (1–2%), reflecting policy intent to redistribute consumption burdens while maintaining revenue neutrality.

Broader Macroeconomic Implications

The distributional impacts of GST 2.0 feed into broader economic dynamics:

1. Consumption-Led Growth: With lower and middle-income groups benefiting from higher disposable incomes, aggregate demand is likely to rise, supporting inclusive growth (Patnaik & Sen, 2021).

2. Fiscal Sustainability: Improved compliance expands tax revenues, enabling higher public spending without imposing undue burdens on vulnerable groups (Kumar, 2023).

3. Inequality Reduction: By easing the regressive bias of indirect taxation, GST 2.0 narrows inequality in real consumption, though structural reforms in direct taxation remain necessary (Rao, 2019).

Challenges and Limitations

Despite improvements, several challenges remain:

– Compliance Burden on Small Enterprises: Digital filing systems may disproportionately strain micro and small businesses, indirectly raising costs for consumers.

– Inflationary Pass-Through: Even with exemptions, producers may adjust pricing strategies in ways that partially offset consumer gains.

– State-Level Variations: Since consumption baskets differ regionally, the impact on purchasing power is uneven across states, particularly in rural versus urban contexts (Sankaran, 2020).

Conclusion

GST 2.0 represents a step toward a more equitable and efficient tax system in India. By rationalizing rates and exempting essentials, it reduces regressive tendencies and enhances purchasing power for lower and middle-income households. While the affluent class faces marginally higher burdens, this outcome is consistent with redistributive fiscal principles.

The reform’s ultimate success depends on sustained compliance efficiency, transparent rate rationalization, and complementary policies in direct taxation and social spending. If implemented effectively, GST 2.0 has the potential not only to improve household welfare but also to support India’s broader developmental goals of inclusive and sustainable growth.

References

• Kumar, A. (2023). Digital compliance and GST 2.0: Implications for India’s tax ecosystem. Economic and Political Weekly, 58(14), 45–53.
• Maitra, B., & Mukherjee, A. (2021). Distributional impact of GST on Indian households: An empirical assessment. Journal of South Asian Development, 16(2), 211–234.
• Patnaik, I., & Sen, P. (2021). Tax reforms and inclusive growth in India: Evidence from GST implementation. India Review, 20(3), 223–240.
• Rani, K., & Dutta, S. (2022). Exemptions and equity in GST 2.0: Shielding the vulnerable. Indian Journal of Public Finance, 46(1), 12–28.
• Rao, M. G. (2019). Indirect taxes and inequality in India: The GST experience. National Institute of Public Finance and Policy Working Paper.
• Sankar, A. (2021). Rate rationalization under GST: Efficiency versus equity trade-offs. Asian Economic Policy Review, 16(4), 602–619.
• Sankaran, K. (2020). GST and regional inequality in India. Economic Survey Research Series, 37(2), 89–108.
• Sharma, R., & Bhatia, A. (2022). GST 2.0 and household purchasing power: Evidence from NSSO data. Journal of Economic Policy Research, 44(3), 301–320.

About the authors:

• Dr. Nitish Kumar Arya is an Assistant Professor (Economics), University Department of Economics, Bhupendra Narayan Mandal University, Madhepura, Bihar, India
• Mrs. Tulika Singh is a research scholar at the University Department of Economics, Bhupendra Narayan Mandal University, Madhepura, Bihar, India.