GST 2.0 and Its Impact on the Manufacturing Industry in Karnataka: A Post Implementation Analysis (2025 Onwards)

Abstract The Goods and Services Tax 2.0 (GST 2.0), effective September 22, 2025, constitutes the most consequential overhaul of India’s indirect tax architecture since the original GST rollout in July 2017. Anchored in three pillars—rate rationalization, structural reform, and ease of doing business—GST 2.0 replaces the four-slab framework (5%, 12%, 18%, 28%) with a simplified two-slab structure (5% and 18%) supplemented by a 40% demerit rate on luxury and sin goods. This study examines the impact of GST 2.0 on the manufacturing sector in Karnataka—India’s fourth-largest manufacturing state— employing secondary data analysis drawing on GST Council notifications, Annual Survey of Industries (ASI) microdata, Udyam Registration Portal statistics, DGCI (2) to evaluate how administrative reforms affect working capital and compliance burdens; (3) to assess differential impacts across enterprise sizes and sub-sectors; and (4) to examine the relationship between GST 2.0 and manufacturing competitiveness, formalization, and export performance across Karnataka’s key clusters. The study contributes to the literature on consumption tax reforms in federal developing economies, specifically addressing the transition from a nascent to a mature GST system (Bird Rao Agarwal and Bharadwaj (2021) identified automotive sector competitiveness gains from seamless inter-state credit flows. Karnataka’s GST collections grew at 8.9% CAGR, from ₹32,400 crore (2017–18) to ₹58,700 crore (2023–24) (GST Council, 2024). However, Dutta and Mullick (2022) quantified MSME compliance costs at 2.3% of turnover—ten times higher proportionally than for large enterprises. Textile manufacturers faced chronic inverted duty distortions, with man-made fibre (MMF) inputs taxed at 18% against 5–12% output rates, generating ITC blockages averaging 127 days to refund (Ministry of Textiles, 2023). Classification disputes burdened machinery manufacturers at 34% dispute incidence (Karnataka State Industrial Profile, 2023). These structural limitations provided the political and empirical foundation for GST 2.0. 2.3 Research Gap Three gaps justify this study. First, no published work examines post-September 2025 GST 2.0 impacts on Karnataka’s manufacturing sector using official secondary data. Second, existing literature addresses GST 1.0 rate effects; the structural shift to a two-slab architecture demands fresh analytical frameworks. Third, national-level GST 2.0 assessments obscure Karnataka-specific industrial structures and cluster compositions. Cross-country evidence supports the expectation of significant benefits: Adhikari’s (2020) 47-country panel found a 4.2% manufacturing value-added increase following VAT rationalization, with gains accelerating in the post-implementation maturation phase. Australia’s second-decade GST reforms similarly yielded productivity gains once compliance systems stabilized (Valadkhani (2) ASI microdata for Karnataka (2015–2023); (3) Udyam Registration Portal data (2017–2024); (4) DGCI (5) Karnataka Economic Survey volumes (2016–2024); and (6) FICCI, CII, ICICI Securities sectoral impact assessments and NIPFP fiscal multiplier research. The study period spans the GST 1.0 baseline (2015–2025) and the post-GST 2.0 implementation phase. Given that GST 2.0 has been in effect for under six months at time of writing, this study combines retrospective secondary data analysis with forward-looking impact assessment grounded in official rate schedules, following Rao and Chakraborty’s (2020) approach for emerging policy reforms. Analytical methods comprise: (a) comparative rate analysis reconstructing pre- and post-GST 2.0 effective tax rates using GST Council rate schedules and ASI input-output data; (b) working capital impact assessment of administrative reform changes using GSTN and RBI MSME credit data; (c) cluster-level structural analysis mapping rate changes to Karnataka’s five major industrial clusters; and (d) formalization and export trend analysis using Udyam and DGCI attribution challenges between GST 2.0 and concurrent policies (PLI schemes, US tariff pressures); and reliance on state GST share calculations for Karnataka-specific effective rate estimates. 4. Results 4.1 Structural Architecture: GST 1.0 versus GST 2.0 Table 1 presents the structural comparison between the two regimes, encompassing both rate architecture and administrative reforms. Together, these changes represent a qualitatively distinct departure from the incremental adjustments of the GST 1.0 era. Table 1: Structural Comparison: GST 1.0 versus GST 2.0 Parameter GST 1.0 (2017–2025) GST 2.0 (from Sept 22, 2025) Rate structure 4-slab: 5%, 12%, 18%, 28% 2-slab: 5% goods migrated to 5% or 18% Inverted duty relief Ad hoc refunds; avg. 90–130 days Structural correction; 90% provisional refund in 7 days GST registration 7–15 days for MSMEs 3 working days (low-risk businesses, ~96% of applicants) Export refunds 30+ days 7 days automated (claims < ₹1,000 crore) Returns Manual GSTR-1/3B filing Pre-filled auto-drafted GSTR-2B with reconciliation alerts GSTAT / NAAAR Non-operational; 40,000 cases pending Operationalized; binding precedent mechanism established Note. Sources: GST Council 56th Meeting (Sept 3–4, 2025); CBIC Notification effective Sept 22, 2025; PIB (2025); MBGCORP (2025). NAAAR = National Appellate Authority for Advance Rulings. 4.2 Rate Rat