Introduction

At the COP26 summit in Glasgow in 2021, India committed to achieving net-zero carbon emissions by the year 2070 and unveiled its ambitious Panchamrit targets, which focus on expanding renewable energy capacity, reducing carbon intensity, and decreasing reliance on fossil fuels. Four years later, during the 56th GST Council Meeting in 2025, India introduced GST 2.0 reforms, aimed at rationalizing tax rates across sectors integral to green development, including renewable energy, green technologies, waste management, and sustainable transportation. This initiative marks a significant milestone as it integrates climate action directly into fiscal policy, signaling that economic growth and environmental sustainability can progress hand in hand. Moreover, GST 2.0 underscores India’s emerging leadership in climate governance alongside its developmental priorities.

Core Features of GST 2.0

·       The reforms under GST 2.0 have led to a reduction in GST rates for renewable energy technologies such as solar panels, photovoltaic cells, and wind turbines, effectively lowering upfront project costs. Solar pumps, in particular, have become more affordable for farmers, thereby reducing irrigation expenses. The policy also supports green manufacturing by complementing the Production-Linked Incentive (PLI) schemes focused on renewable energy and electric vehicles (EVs), enhancing the global competitiveness of Indian companies in these sectors.

·       Additionally, waste management services have benefited from tax reductions—for example, the GST on effluent treatment services has been lowered from 12% to 5%, while biodegradable bags now attract a reduced GST of 5%, down from 18%. In the transportation sector, GST cuts have made buses and minibuses more affordable by reducing rates from 28% to 18%, while trucks and freight vehicles have also become more accessible, facilitating the decarbonization of logistics.

Domestic Economic Implications

Lower tariffs on clean energy have made sustainable options more affordable for both households and industries, driving higher adoption rates. This shift is especially impactful in rural areas, where solar pumps have reduced dependence on diesel, thus cutting costs and emissions. GST reductions also strengthen domestic manufacturing by bolstering supply chains for renewable energy modules, turbines, and green batteries, positioning India as a potential global hub for clean manufacturing. Consumers stand to benefit from lower electricity bills and transport costs, improving access to green alternatives particularly among low- and middle-income groups. Moreover, these reforms are expected to spur job creation in sectors such as waste management, renewable energy projects, and the expanding EV ecosystem, generating new roles in operations, maintenance, and research and development.

Global Context

India’s GST 2.0 reforms respond to increasing international pressures such as the European Union’s Carbon Border Adjustment Mechanism (CBAM), which imposes tariffs on carbon-intensive imports, and the United States’ Inflation Reduction Act (IRA) of 2022, which offers substantial subsidies for clean manufacturing. GST 2.0 provides India with a domestic fiscal strategy that lowers the cost of renewables while protecting exports from carbon tariffs, aligning the country’s trade competitiveness with the global transition towards a low-carbon economy. As many developing countries grapple with the high costs of green technologies, India’s fiscal innovations hold the potential to serve as a replicable model for climate-friendly taxation, especially within the Global South.

Environmental and Social Impacts

By lowering the cost barriers, GST 2.0 accelerates India’s path towards achieving its goal of 500 GW renewable capacity by 2030, a key Panchamrit commitment. The incentives for effluent treatment and biodegradable products contribute to cleaner air and water, supporting the phase-out of plastic through more affordable biodegradable bags in line with the UNEA Global Plastics Treaty. Furthermore, tax cuts on buses encourage greater use of public transportation, reducing urban congestion and emissions. These reforms also promote inclusive growth: farmers benefit from lower irrigation costs, and urban commuters gain access to more affordable and sustainable transport options.

Fiscal Policy and Climate Action

·       GST 2.0 marks a pioneering step in incorporating fiscal mechanisms into climate governance. Rather than relying solely on subsidies, the revised tax structure now encourages industries and citizens to make sustainable choices by default. This approach creates a stable framework that promotes long-term investment certainty, attracting international capital into India’s clean economy and making green options the standard rather than an aspiration.

·       From a strategic standpoint, India can leverage GST 2.0 as a tool of climate diplomacy, showcasing it at COP30 in Brazil later in 2025 as an example of integrating fiscal policy with climate action. Industrially, scaling up renewables ensures that India’s exports will meet CBAM requirements, helping the country avoid future carbon tariffs. It also enhances India’s position in global supply chains related to electric vehicles, solar energy, and green hydrogen. Geopolitically, these reforms establish India as a thought leader within the Global South, demonstrating how fiscal reforms can harmonize economic growth with environmental sustainability.

Challenges Ahead

Despite these advances, there are challenges that must be addressed. Reduced GST rates could impact short-term government revenue, making it essential to maintain fiscal stability. Implementation requires robust monitoring to guarantee that the benefits reach consumers rather than intermediaries. Technological gaps persist, particularly in domestic research and development for advanced solar cells, battery storage, and hydrogen technologies. Equity concerns remain, as small firms and MSMEs need support to adapt to green supply chains without facing disproportionate burdens. Furthermore, coordination is required to align GST reforms with state-level policies, the National Action Plan on Climate Change (NAPCC), and sector-specific roadmaps.

Way Forward

·       Future efforts should deepen fiscal reforms by introducing green GST credits for industries that reduce emissions. Integrating GST 2.0 with India’s planned Carbon Credit Trading Scheme (CCTS) would further strengthen its impact. Support measures like low-cost loans and skill development must be extended to MSMEs to ensure their participation in green supply chains.

·       Additionally, consumer incentives, such as GST rebates for households adopting rooftop solar panels or electric vehicles, could boost uptake. Institutional capacity should be enhanced by empowering the GST Council’s Green Sub-Committee to conduct regular reviews of GST rates and their effectiveness.

Conclusion

GST 2.0 embodies a historic convergence of fiscal policy and climate action. At a time when countries worldwide experiment with climate-aligned fiscal tools, India has delivered an innovative, homegrown model of green taxation. This reform strengthens India’s domestic economic resilience, boosts its global competitiveness, and reinforces its leadership in climate governance—marking a decisive step toward realizing the nation’s 2070 net-zero emissions target.