GST 2.0’s Missing Link: Why consumer protection must anchor tax reform?

Intended beneficiaries are still being left out of the Centre’s relief programme

By R. Suryamurthy

When India recalibrated its GST structure in September 2025, the promise was seductively simple—cut taxes, soften prices, revive demand. It was a proposition that carried both political appeal and economic logic, particularly in an economy where consumption had yet to regain durable momentum and household balance sheets remained under strain. Lower indirect taxes, policymakers argued, would ease the cost of living and nudge consumers back into the marketplace, setting off a virtuous cycle of demand and growth.

Six months later, that promise appears increasingly tenuous. The evidence emerging from price data, early studies, and lived consumer experience points to a far more uneven reality: tax cuts have not consistently translated into lower retail prices. In several essential categories, prices have remained stubborn—or, in some cases, have even risen. What was designed as a demand-side stimulus risks mutating into a supply-side gain, with benefits captured upstream rather than passed on to the consumer.

At one level, this is a story about flawed assumptions. GST 2.0 rested on a transmission mechanism that, while elegant in theory, has proven unreliable in practice. The expectation was straightforward: reduce tax incidence, and producers and retailers would lower prices accordingly. But markets rarely operate on such linear logic. They are shaped by incentives, power structures, and behavioural responses that policy often underestimates.

A recent working paper by the National Institute of Public Finance and Policy (NIPFP), authored by Sacchidananda Mukherjee and ShivaniBadola, captures this divergence with unusual clarity. As the authors observe, “the pass-through of GST rate reductions to consumer prices has been uneven across commodity groups, with significantly weaker transmission observed in essential goods compared to discretionary items.” That assessment, cautious in tone but sharp in implication, underscores the central tension within GST 2.0.

What is now visible is a two-speed pattern of price transmission. In discretionary segments—automobiles, consumer durables, air conditioners—prices have adjusted downward in line with tax cuts. These are markets where demand is elastic, where consumers respond quickly to price changes, and where firms compete aggressively for market share. Passing on tax benefits, in such contexts, is not an act of compliance; it is a business strategy.

But in the economy of essentials, the story changes. Goods that form the backbone of household consumption—milk, edible oils, packaged foods, personal care products—have not experienced comparable price relief. In several cases, prices have edged higher despite lower GST rates. This divergence is not accidental. It reflects deeper structural features of these markets.

Demand for essentials is inherently inelastic. Households cannot meaningfully postpone or reduce consumption of basic goods because prices remain high. This weakens the incentive for firms to pass on tax reductions. Layered onto this are supply chain rigidities, entrenched distribution margins, and, in certain sectors, a degree of market concentration that limits competitive pressure. The result is a muted—or entirely absent—transmission of tax benefits.

In effect, the consumer is left out of the equation. This is not merely an economic inefficiency; it is a distortion with distributive consequences. GST, as a consumption tax, is ultimately borne by the end user. Its fairness depends on whether tax reductions translate into lower prices. When they do not, the intended relief is diverted elsewhere—into corporate margins, intermediary gains, or price advantages in segments consumed disproportionately by higher-income groups.

The consequence is a subtle but significant redistribution. Instead of easing the burden on households struggling with rising living costs, GST 2.0 risks amplifying consumption inequalities—delivering visible gains in discretionary sectors while leaving essentials largely untouched. This is where the absence of a strong consumer protection framework becomes critical.

The original GST architecture did include a safeguard against such outcomes. The anti-profiteering clause, implemented through the National Anti-Profiteering Authority (NAA), was designed to ensure that reductions in tax rates were passed on to consumers. For all its imperfections—procedural delays, interpretational ambiguities, and occasional overreach—the NAA performed an important signalling function. It conveyed that tax benefits were not to be quietly absorbed within the value chain.

Today, that signal has weakened. With the NAA’s tenure having lapsed and its functions diffused into a less visible institutional arrangement, enforcement has lost both clarity and force. What remains is a framework that appears reactive rather than proactive, fragmented rather than focused. In such an environment, especially in sectors with weak competition, the incentive to pass on tax cuts diminishes further.

The result is not dramatic price spikes or overt profiteering. It is something subtler, and perhaps more consequential: behavioural drift. Firms adjust slowly, selectively, or not at all. Tax reductions become margin buffers rather than consumer benefits. And in the absence of scrutiny, this becomes the norm rather than the exception.

The implications extend beyond individual price points. When consumers do not experience tangible relief, the macroeconomic objective of stimulating demand begins to falter. Consumption remains subdued, not because tax rates are high, but because disposable incomes are constrained and prices have not responded. The policy, in effect, loses its intended traction.

Equally concerning is the erosion of trust. Tax reforms derive legitimacy from their perceived fairness. When households are told that taxes have been cut but see little change in their daily expenses, scepticism deepens. Over time, this scepticism can harden into resistance—not just to GST, but to future reforms more broadly.

Addressing this gap requires a shift in policy emphasis—from designing tax cuts to ensuring their delivery. The first step is to re-establish a credible anti-profiteering mechanism. This need not mean resurrecting the NAA in its original form, with all its procedural complexities. But it does require an institution—or a coordinated framework—with the authority, resources, and technological capability to monitor price behaviour in real time. The GST system already generates granular data through invoices and returns. Leveraging this data to track sector-specific trends, identify anomalies, and flag weak pass-through is both feasible and necessary.

Transparency must form the second pillar of reform. At present, consumers have limited visibility into how tax changes affect the prices they pay. Introducing clearer disclosure norms—whether through itemised billing, periodic reporting, or digital dashboards—could help bridge this gap. While transparency alone cannot enforce compliance, it can create reputational incentives and empower consumers with information.

Competition policy, too, has a role to play. In markets characterised by concentration or entry barriers, the transmission of tax benefits is inherently weaker. Strengthening antitrust oversight, facilitating market entry, and improving supply chain efficiencies can enhance competitive pressures and improve price outcomes. These interventions may sit outside the traditional GST framework, but they are integral to its effectiveness.

There is also a strong case for prioritising essentials in enforcement. Not all sectors carry equal weight in terms of consumer welfare. Monitoring efforts must be disproportionately focused on goods and services that constitute the bulk of household expenditure. A uniform, sector-agnostic approach risks overlooking the very segments where consumer distress is most acute.

Equally important is the need to look beyond aggregate indicators. Headline inflation numbers often mask underlying divergences. A fall in prices of high-value discretionary goods can offset increases in essential items, creating an illusion of stability even as household budgets come under strain. Policymakers must engage with disaggregated data to fully understand the impact of GST changes.

None of this is to suggest that GST 2.0 lacks merit. Rationalising tax rates, simplifying structures, and attempting to stimulate demand are all necessary steps. But intent, without effective transmission, is insufficient. The success of any indirect tax reform ultimately depends on its impact at the point of consumption.

And it is here, in the everyday economy of households, that GST 2.0 appears to be underperforming. India’s GST journey has always been iterative, shaped by adjustments and course corrections. GST 2.0 was meant to be a step forward—a recalibration aligned with the needs of a demand-constrained economy. Instead, it has highlighted a more fundamental challenge: ensuring that policy benefits reach the consumer.

Bridging this gap requires more than incremental tweaks. It demands a reorientation of priorities—placing consumer protection at the centre of tax policy, rather than at its margins. Because in the end, the measure of GST’s success is not found in policy documents or rate tables. It is found in the lived experience of millions of households—in the price of milk, the cost of groceries, the monthly balancing of income and expenditure.

Until those numbers begin to reflect the promise of reform, GST 2.0 will remain an incomplete project—one where the consumer, despite being its intended beneficiary, continues to be left behind. (IPA Service)