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Among the most significant measures is the exemption of individual health and life insurance services. At first glance, the exemption alleviates financial burdens on households by lowering premium costs, signaling a welfare-oriented intent. Simultaneously, it encourages wider insurance penetration, aligning with the government's vision of 'insurance for all' by 2047. However, the exemption carries a sizeable fiscal cost with estimates suggesting a revenue foregone of nearly INR 97 billion annually. Economically, it would strengthen demand for formal insurance coverage, thereby easing healthcare affordability. However, the exemption creates new distortions in the credit chain. Insurers will continue to incur input GST on distribution, technology, and administrative services, yet will be unable to offset the same against exempted output, leaving them with stranded credits. In practice, this could either squeeze margins or lead to selective cost pass-through in premiums, undermining the intended consumer relief
A further nuance lies in the scope of the exemption, which applies only to individual life and health insurance policies, not to corporate group insurance schemes. For corporates that provide medical coverage as part of compensation packages, premiums will remain taxable at 18%. This distinction has two practical implications: Primarily, it ensures that the fiscal cost of the exemption is contained by limiting it to household-level policies. Secondly, it may distort because employees covered under corporate policies would not benefit from reduced premiums, and companies cannot claim ITC due to the explicit restriction under blocked credit provisions.
The rate restructuring for the hotel and restaurant industry signals a clear policy tilt towards simplification, but it carries layered implications, for hotels with room tariffs below INR 7500, a shift from 12% (with ITC) to 5% (without ITC) eliminates the entitlement to claim credit on capital goods and input services. As a result, operators are required to reverse any unutilised credits corresponding to the remaining months1. This creates an immediate cash-flow and compliance burden, especially for mid-sized hotels that have recently invested in renovations or expansions. Hotels with a mix of room tariffs now face a dual regime: rooms priced below INR 7500 will be taxed at 5% (without ITC), while rooms above INR 7500 continue at 18% (with ITC), necessitating complex apportionment of credits2. Independent restaurants remain at 5% (without ITC), but the option to declare as a 'specified premise' and opt for 18% with ITC has now been withdrawn, narrowing flexibility for operators who relied on credit to offs
The reforms also extend meaningfully to job-work services, which are a critical link in the pharma, textiles, and wider MSME manufacturing ecosystem. Shift of specific categories such as pharma job work, printing, and labour-intensive activities have been shifted to a concessional 5% rate, while all other residual job-work services have been aligned at 18%. On the face of it, the lower rate provides welcome relief to contract manufacturers and MSMEs, where margins are thin and job work often constitutes a substantial share of production costs. By easing this burden, the change helps preserve competitiveness and employment across decentralised clusters. Yet, the structure also introduces a new layer of complexity: with two distinct rates in operation, businesses will need to ensure precise classification of job-work activities to prevent disputes. Principals and job workers alike must strengthen documentation, contractual terms, and invoicing practices to ensure eligibility and smooth flow of ITC. In particular, where job-work is intertwined with ancillary activities, demarcating which elements qualify for concessional treatment will be critical. Over time, the dual-rate design has the potential to stabilise into a predictable framework, but only if clear guidelines and consistent application are ensured. Otherwise, lingering ambiguities could open the door to avoidable litigation.
The reform agenda has also been carried into the sphere of social and cultural services, reflecting the government's broader effort to weave sustainability objectives into the fabric of GST 2.0. Concessional treatment has been provided to low-value cinema tickets, biomedical waste management, and effluent treatment services. While the impact on overall revenue collection may be modest, the social and policy dividends will be significant. By reducing the tax burden on small cinema halls and low-priced tickets, the reform promotes more affordable access to cultural entertainment, especially in semi-urban and rural areas where such outlets are often the only affordable leisure option. Similarly, lowering GST on biomedical and effluent treatment directly reduces costs for hospitals, laboratories, and industrial units, strengthening compliance with environmental and healthcare regulations. In effect, the policy nudges businesses and institutions towards more sustainable and socially beneficial practices, while en
The transport and logistics sector has also seen a significant recalibration under GST 2.0. With the phasing out of the 12% rate slab, passenger and goods transport services, which were earlier taxable under 12% (with ITC), are now uniformly taxed at 18% (with ITC). This rationalisation extends across public transport, multimodal freight, petroleum pipeline transport, and vehicle rental services, bringing coherence to a sector long plagued by fragmented tax treatment and ensuring consistency. The reduction in GST on the purchase of trucks, buses, and passenger vehicles used for transport has eased procurement costs by nearly 10%, offering tangible working-capital relief to fleet operators.
In the construction and contracting sector, offshore oil and gas contracts, along with government projects involving large-scale earthwork, will now be taxed at 18%, aligning them with the broader works contract framework. For the government, this seems like a revenue-positive move.
Casinos, race clubs, and online gaming platforms now face a steep 40% levy, marking a sharp increase in their effective tax incidence under the GST framework. This change is accompanied by stricter regulatory measures, especially targeting online money gaming, which is set to be outlawed, underscoring the government's intent to curb potential social harms associated with gambling. However, it may also disrupt business models, stifle innovation, and drive parts of the industry underground if not carefully implemented.
GST 2.0's service sector recalibration is not merely a rate exercise but a deliberate attempt to rebalance welfare, revenue, and efficiency. By deepening credit alignment, incentivising formalisation, and rationalising slabs, the reform strengthens India's tax base while providing targeted relief to households.
Shilpa Verma, Associate Director, Grant Thornton Bharat, has also contributed to this article.
This article first appeared in the Taxmann on 29 October 2025.
