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The retail sector, one of India’s largest contributors to GDP and a major source of employment, continues to serve as the backbone of the country’s consumption-driven economy. Over the past decade, rising discretionary spending, the growth of organised formats, and rapid digitalisation have reshaped the way India shops. As the sector evolves, retailers are also navigating certain structural and operational complexities within the GST framework that influence day-to-day business functioning.
While GST 2.0 has delivered meaningful progress in areas such as tax unification, compliance transparency, and reduction of litigation, some practical challenges still persist for retailers, particularly small and medium enterprises. Factors such as inverted duty structures, input tax credit (ITC) accumulation, classification-related ambiguities, and higher compliance requirements can create operational inefficiencies and impact margins.
With the Union Budget around the corner, the industry’s expectation is clear: a transformative, business-friendly GST 2.0 architecture that simplifies rates, rationalises customs duties, reduces friction across supply chains, and ensures parity between offline and online commerce. A more streamlined tax ecosystem would help unlock the next phase of retail-led economic growth, complementing India’s broader push toward formalisation and a more efficient logistics and supply chain ecosystem.
The government’s move to classify essential items, such as medicines and staple foods like bread and parathas, as exempt or nil-rated has undeniably brought relief to consumers and reduced long-term litigation. However, this reform has also created an operational challenge for retailers, who must now precisely segregate ITC across common and specific inputs used for exempt versus taxable supplies under Section 17(5) of the CGST Act and Rule 42.
This reversal mechanism increases backend workload, raises compliance costs, and contradicts the core objective of GST 2.0: simplification. Since ITC cannot be availed on inputs used for nil-rated supplies, the tax paid on such inputs becomes part of the product cost, moderating the actual benefit passed on to consumers.
Similarly, the inverted duty structure on input services continues to weigh heavily on segments like apparel and lifestyle retail. While garments up to INR 2,500 attract 5% GST, critical input services- rent, advertising, logistics, consulting—remain taxed at 18%. The resulting accumulation of unutilisable ITC leads to working capital blockages and reduced liquidity, especially for mid-sized brands already navigating thin margins.
Classification challenges also remain prevalent for large format and supermarket retailers. Earlier instances, such as popcorn variants attracting different rates under GST 1.0, generated confusion and litigation. Although GST 2.0 provides more clarity (for example, a uniform 5% on all popcorn variants and clarified treatment of ice-cream parlours as suppliers of goods), the sheer diversity of retail assortments means classification-related queries may continue to surface, even as the framework evolves.
India’s e-commerce and quick commerce sectors have emerged as major drivers of consumption, logistics innovation, MSME market access, and youth employment. Yet, despite the sector’s pivotal role, GST 2.0 offers limited direct relief to digital retailers.
While rate reductions on appliances and durables have supported online sales, some structural elements of the GST regime continue to influence the digital retail landscape. The 18% GST on logistics impacts delivery costs and margins, and compliance requirements, such as state-wise registrations, TCS, and platform-level obligations, introduce additional complexity for sellers. These areas present opportunities for further streamlining as the ecosystem matures.
Input services such as warehousing, marketing, and packaging attract higher GST than the output rate for many commonly sold items, resulting in inverted duty structures and blocked ITC. This increases working capital pressure at a time when digital commerce models are already transitioning towards profitability.
To fully empower the digital retail ecosystem, the next phase of GST reform must address foundational needs:
A progressive set of refinements to GST 2.0 can further accelerate the growth of one of India’s most dynamic and globally competitive consumer sectors.
Even though GST 2.0 has advanced the tax landscape, certain structural aspects still present opportunities for enhancement. As India aspires to become a USD 5 trillion economy, strengthening consumption, boosting supply chain efficiency, and enhancing the global competitiveness of retail will be key. An agile, responsive GST framework can play a pivotal role in enabling this transition.
By further clarifying classification norms, rationalising duty structures, ensuring more equitable ITC utilisation, and simplifying compliance processes, the government can help unlock a more resilient and future-ready retail ecosystem. These steps would support formalisation, attract investments into modern retail infrastructure, empower MSMEs, and reinforce consumer confidence.
A simplified, technology-driven GST 2.0, aligned with the evolving realities of omnichannel commerce, can ease operational complexities and strengthen retail’s role as a key pillar of India’s economic growth story.
This article first appeared in the ET Retail on 8 January 2026.
