GST 2.0: What it means for India’s MSMEs

With a simplified two-slab structure, faster refunds, and a push for digital adoption, the new Goods and Services Taxes (GST) 2.0 framework promises to ease compliance burdens, unlock working capital, and enhance global competitiveness for India’s 5.93 crore MSMEs. 

But what does it mean for micro, small and medium enterprises (MSMEs)? SMBStory asks experts from across industries to weigh in. 

Simplifying the tax maze

For years, MSMEs have struggled with India’s multi-slab GST system—at 5%, 12%, 18%, and 28%. Often, players were caught in either classification challenges or compliance confusion. 

With GST 2.0, the system has simplified the tax structure for MSMEs under two slabs—at 5% for essential and merit goods, and 18% for standard goods and services.

"GST 2.0 is a watershed reform that simplifies our tax framework and strengthens the foundations of growth. By collapsing multiple slabs into a clearer structure, the government has lowered costs for consumers, freed up working capital for businesses, and created a level playing field across sectors,” says Shachindra Nath, Founder and MD, UGRO Capital.

Whether it is textiles, tourism or automobiles, MSMEs stand to benefit directly through reduced tax inversion, lower costs, and easier compliance. For millions of small enterprises, this means greater liquidity, faster formalisation, and deeper integration into organised supply chains. 

The timing is equally important, Nath believes, with GST 2.0 announced right ahead of the festive season. 

Paramdeep Singh, an early-stage investor in fintech startups, echoes this thought. He believes that a simplified two-rate structure will lower the grey zones in product classification and make compliance easier for SMBs. 

“The current multi-slab system often leads to confusion at the invoicing and audit level. By merging mid-range slabs and reducing overlaps, GST 2.0 has the potential to lower legal disputes and advisory costs for small businesses,” he says.

The two-slab GST structure is more than just a rate change; it is a structural reset aimed at reducing classification disputes, correcting inverted duty structures, and giving industries “the long-term certainty it has been seeking,” Kulraj Ashpnani, Partner at Dhruva Advisors LLP, adds. 

That said, Singh cautions that “edge cases” will still need clarity and ongoing support. 

Easing the working capital crunch

One of the most persistent challenges for MSMEs under GST has been blocked input tax credit (ITC) and delays in refunds. 

With the recent changes, Parimal Kumar Shivendu, Group Head at Easebuzz, is optimistic. “The fixes, such as easing inverted duty refund (where GST rate on input materials is more than outward supplies) rules, automating ITC processes, and allowing invoice-based credit claims, could be transformational for MSMEs.” 

“Blocked input tax credit often stalls working capital, delaying production cycles and vendor payments,” he says, adding that GST 2.0 is expected to ensure faster refunds and eliminate manual bottlenecks, thereby improving liquidity for SMBs.

Singh explains: “The reform’s aim to streamline refunds and unblock ITC is promising. The inverted duty structure, where input taxes exceed output taxes, has long strained MSME working capital, especially in sectors like edible oils. If the reforms deliver faster, automated refunds, and clearer ITC rules, MSMEs could see a measurable reduction in the working capital cycle.” 

“Though success will hinge on digital governance and portal efficiency,” he adds. Similarly, Prakash opines that although GST 2.0 has the potential to ease liquidity pressures, the system automation needs to be paired with forward-looking reforms. 

Correcting inverted duty structures could significantly alter MSME cost dynamics. Raw materials often attract higher GST than finished products, creating inverted duty structures. 

GST 2.0’s focus on fixing this imbalance will lower the effective cost of production, free up blocked capital from delayed refunds, and encourage scaling. For instance, Shivendu explains, “Textile MSMEs currently facing 18% GST on dyes and 5% on output fabric would benefit from rate alignment, making them more competitive both domestically and abroad.”

For exporters, Singh argued that “GST 2.0 should end the inverted duty structure that locks up ITC and hampers cash flow. For small exporters, this could translate into lower landed costs, improved margins, and stronger pricing power in global markets.”

Dinesh Talera, Co-founder of Mysore Saree Udyog, believes that GST 2.0 can be a true win-win. “For businesses like ours, it simplifies compliance, frees up working capital, and brings transparency across the value chain.” 

“For the economy, it formalises the unorganised sector, boosts productivity, and secures livelihoods for artisans. For the government, it widens the tax base and ensures stable revenue,” he adds. 

He emphasises the simplicity as the ‘real game-changer’, adding that if invoicing and return filing are made easy, even the smallest weaver or trader can adopt the system confidently. “This will pull more of the unorganised sector into the formal system, widen the tax base, and bring full transparency to the value chain.”

Final word

Beyond compliance, GST 2.0 could also reshape credit access. 

Jaspreet Singh, Co-founder of KreditVenture, says, “GST 2.0 heralds a significant shift for India's MSME sector… The streamlined processes will reduce paperwork and compliance costs, enabling MSMEs to focus more on growth and innovation. Increased GST filings will provide clearer visibility of formal income for lenders like us, improving credit evaluation.”

However, despite long-term benefits, experts caution that the transition might not be seamless. 

Singh warns that many MSMEs lack digital infrastructure and readiness for sudden changes. “Repricing, packaging changes, and training will require swift action. Without pre-emptive advisory outreach and tech support, compliance hiccups are likely,” he adds. 

Prakash agrees to this, stressing the need for a “reasonable transition window” to ensure smooth adoption. 

Shivendu adds, “Tech-forward SMBs are expected to transition quickly without much friction. And traditional SMBs may face short-term challenges like repricing products, updating ERPs, and accounting systems and training staff for the new compliance protocols.”

He called for simple and mobile-friendly digital filing tools, language-accessible compliance training, government-backed advisory helplines, partnerships with fintechs and GST Suvidha Providers. 

Ashpnani summed up the broader vision: “This proposal is not just about tax rates; it’s about evolving GST into a simple, stable, and transparent system that supports inclusive growth and strengthens India’s journey towards Atmanirbhar Bharat.”