GST 2.0: Just a year after India overhauled the GST rate structure, the government is preparing for another round of reform. The September 2025 exercise was largely about simplifying the tax structure. The next phase is about how the system works in practice: how invoices are issued, input tax credit is claimed, errors are corrected, disputes are resolved and legitimate claims are processed.
That shift will be at the centre of the GST Council meeting on October 7. Finance Minister Nirmala Sitharaman has said the Council will focus on process reforms, including e-invoicing, input tax credit and litigation, rather than another exercise in rate rationalisation. The move reflects a recognition that GST’s next set of problems lies less in the number of tax slabs than in the machinery through which the tax is administered.
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GST therefore has two distinct dimensions. One concerns the tax itself: which goods and services attract 5%, 18% or the higher rate applicable to specified categories. The other concerns administration. How does a business issue an invoice? How does the buyer establish its entitlement to credit? What happens when the supplier makes an error? How does the tax administration identify fraudulent transactions without treating every mismatch as evidence of evasion?
The second set of questions is now becoming the more important one.
E-invoicing has changed the information available to GST
E-invoicing is one of the most consequential elements of this process reform. The mandate has been progressively extended since 2020 and now covers taxpayers with aggregate annual turnover of ₹5 crore or more, subject to the specified conditions and exemptions. Under the system, an invoice is reported to an Invoice Registration Portal, which generates an Invoice Reference Number. Relevant information is then integrated with the GST return system and made available to the recipient through the return architecture.
This changes the nature of tax administration. Instead of reconstructing transactions from periodic returns, the authorities receive transaction-level information much closer to the point at which a supply is recorded. For businesses, the same information can reduce repeated data entry and make reconciliation easier. For the tax administration, it can make duplicate invoicing, fictitious transactions and under-reporting harder to sustain.
The objective, however, should not be reduced to collecting more tax. A better test is whether the system reduces uncertainty for compliant businesses while giving the tax administration better information about transactions that actually warrant scrutiny.
There is some evidence that digitalisation has improved the functioning of GST. A 2026 study using GST data from 2017 to 2024 estimated that GST revenue buoyancy rose from about 0.9 in the early years to around 1.3 by 2023-24. It also reported lower mismatch rates between returns and higher on-time filing as digital compliance mechanisms were phased in. The study itself cautions that the results reflect the combined effects of policy and compliance reforms and that the digital divide remains a constraint for smaller businesses.
That qualification matters. Better data can improve compliance, but the presence of more data does not automatically produce better administration.
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Small businesses should not pay for digitalisation twice
The next question is how far e-invoicing and other digital requirements should be extended, particularly to taxpayers currently outside the system.
Composition taxpayers are an important test. The composition scheme exists to give smaller businesses a simpler compliance framework. Such taxpayers issue bills of supply rather than regular tax invoices and operate under a different compliance architecture.
Bringing them into a wider digital reporting system could improve visibility and reduce opportunities for leakage. But a compliance mechanism designed around the information systems of larger companies cannot simply be extended to a small retailer, trader or local service provider without accounting for the cost of software, bookkeeping, internet access and professional assistance.
The issue is not whether small businesses should eventually become more digital. It is whether each additional reporting requirement produces enough administrative value to justify the compliance cost.
The recent research on GST makes the point particularly well. The 2026 study notes that only 17.94% of rural unincorporated enterprises use the internet for entrepreneurial purposes. Its recommendation of a dual-track compliance system reflects a practical problem: digital enforcement cannot work equally well when the capacity to comply digitally is highly uneven.
GST process reform should therefore distinguish between digitising an obligation and simplifying it. If technology merely shifts a paper-based burden onto a computer screen, the reform has changed the medium without changing the burden.
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ITC needs rules that businesses can predict
Input tax credit is the other major test.
ITC prevents GST from becoming a tax on the same value addition at successive stages of production. If a manufacturer buys raw materials for ₹1 lakh and pays ₹18,000 in GST, then sells the finished product for ₹2 lakh and collects ₹36,000 in GST, it can generally use the eligible ₹18,000 input credit against its output liability and pay the balance.
The difficulty arises because the buyer’s credit position is linked, in part, to information and compliance on the supplier’s side.
GSTR-2B has moved GST towards automated reconciliation by giving taxpayers a statement of eligible and ineligible credit based on information available to the system. But taxpayers remain responsible for determining whether credit is legally available and for reversing credit where required.
That leaves a difficult question for the next phase of reform: what happens to a compliant buyer when the supplier makes a mistake or fails to comply?
A system that blocks legitimate credit for long periods can impose a working-capital cost on a business even when there is no dispute about the underlying transaction. The problem becomes particularly acute when an administrative mismatch is treated as evidence of wrongdoing.
The answer cannot be to remove safeguards against fraudulent claims. Nor should the tax administration assume that every discrepancy is deliberate evasion. The reform challenge is to create a clear hierarchy: routine errors should be capable of quick correction, disputed transactions should receive proportionate scrutiny, and deliberate fraud should attract enforcement.
This is where predictability becomes more valuable than another layer of automation.
More data will not solve bad administration
GST is already a data-intensive tax system. Research from the Indian School of Business on the impact of third-party reporting found that GST reduced some forms of revenue under-reporting, but also found evidence that firms shifted evasion towards less verifiable components, including over-reporting of wage bills.
The implication is important. Tax evasion adapts when enforcement changes. A digital trail can close one route without eliminating the incentive to find another.
That means the success of GST 2.0 should not be measured by the number of invoices processed, alerts generated or returns matched. The harder measure is whether businesses can understand their obligations, correct genuine mistakes without prolonged disputes and obtain legitimate credits and refunds without unnecessary friction.
Litigation has to be part of this reform. So does registration, refunds and the treatment of genuine compliance errors. The GST Council is already expected to consider ways of reducing litigation and simplifying ITC, alongside changes to registration and other processes.
The first decade of GST was largely about creating a national indirect tax system and then stabilising its revenue architecture. The next stage is more mundane, but potentially more consequential. It has to make the system work for the businesses that comply with it every day.
A mature GST administration should know when a discrepancy signals fraud, when it signals a mistake and when it signals a defect in the system itself. That distinction will determine whether GST 2.0 becomes genuine simplification or simply a more sophisticated form of compliance.