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On September 3, 2025, the Goods and Services Tax (GST) Council rolled out one of the most significant reforms since the tax was first implemented in 2017. In its 56th meeting, chaired by Union Finance Minister Nirmala Sitharaman, the Council approved a major overhaul of the indirect tax regime, streamlining GST into just two main slabs — 5% and 18% — with a special 40% slab reserved for sin and luxury goods.
The changes, effective from September 22, 2025, mark a decisive shift aimed at simplifying the tax structure, reducing the burden on households, spurring consumption, and providing clarity to businesses across industries. At the same time, the Council ensured that luxury and harmful products continue to face steep taxation to discourage consumption and protect revenues.
The GST system, since its rollout in July 2017, has gone through multiple rounds of rate rationalisation. Initially, the four-tier structure of 5%, 12%, 18%, and 28% (along with a cess on select goods) aimed to balance revenue generation with affordability. However, businesses and economists consistently pointed out that such a fragmented system led to confusion, classification disputes, and compliance complexity.
With GST 2.0, the Council has finally addressed these concerns by merging the 12% and 28% brackets into the two core slabs of 5% and 18%. This will not only simplify filings and compliance but also give consumers much-needed relief, particularly in essentials, healthcare, and mid-range consumer goods.
At the same time, a special 40% slab ensures that luxury cars, yachts, firearms, and sin goods like cigarettes, pan masala, and aerated beverages continue to remain heavily taxed, protecting government revenues while maintaining a deterrent against socially harmful consumption.
One of the most visible outcomes of GST 2.0 is the relief it provides to everyday households. A long list of essentials and commonly used products now move into the nil or 5% tax slab, significantly lowering prices.
Products that touch every home — from hair oil, shampoo, soaps, shaving cream, and toothpaste — now attract only 5% GST, down from 18%. This single move alone promises to reduce monthly household budgets.
Nil GST: UHT milk, paneer, roti, paratha, chapati, pizza bread, khakhra.
5% GST: Butter, ghee, cheese, dairy spreads, biscuits, cornflakes, chocolates, confectionery, dry fruits, and packaged namkeens.
For middle-class families, these changes mean direct savings on kitchen essentials and packaged foods that previously carried higher rates.
Exempt: Life insurance and health insurance premiums, earlier taxed at 18%.
5% GST: Medical-grade oxygen, thermometers, diagnostic kits, corrective spectacles, and glucometers.
This move not only reduces household medical costs but also encourages wider insurance adoption, addressing India’s traditionally low insurance penetration.
Books, notebooks, maps, pencils, crayons, and other stationery items are now either tax-free or taxed at 5%, helping students and reducing school expenses for parents.
Items such as soaps, hair oil, biscuits, chocolates, and packaged foods are now cheaper, directly benefiting price-sensitive consumers. FMCG companies like Hindustan Unilever, ITC, Nestle, and Dabur are expected to see increased demand as rural and semi-urban consumers respond positively.
18% GST: Small cars (petrol up to 1200 cc, diesel up to 1500 cc, length under 4000 mm), motorcycles up to 350 cc, three-wheelers, and EVs.
40% GST: Luxury cars above 1200/1500 cc thresholds, motorcycles above 350 cc, racing cars, yachts, and private aircraft.
This brings significant relief for India’s largest automobile segment — small cars and two-wheelers — which dominate sales volumes. Auto giants like Maruti Suzuki, Tata Motors, Bajaj Auto, and Hero MotoCorp are expected to benefit.
Cement, steel, and construction materials have moved from 28%/18% to 18% or 5%, cutting costs for developers. With these inputs forming nearly 40–45% of total construction costs, developers can pass on savings to homebuyers, boosting affordability and housing demand.
Renewable devices (solar panels, wind turbines) and inputs now at 5%.
Fertilisers, seeds, drip irrigation systems, and agri-equipment also rationalised to 5%.
This move supports India’s clean energy targets and provides direct relief to farmers, reducing costs of cultivation.
Exemptions for life and health insurance, combined with cuts on medical devices, will not only reduce healthcare costs but also promote greater health coverage and preventive care.
While essentials became cheaper, the Council made sure that goods seen as luxuries or socially harmful face higher taxation. A new 40% slab is now applicable to:
Cigarettes, cigars, gutkha, pan masala, bidis, tobacco.
Aerated sugary drinks, caffeinated beverages, fruit-juice-based carbonated drinks.
Luxury cars (beyond set engine/length thresholds), motorcycles above 350 cc.
Yachts, aircraft for personal use, racing cars.
Firearms (revolvers, pistols, smoking pipes).
Gambling, casinos, horse racing, online betting.
This approach ensures revenue neutrality for the government while reinforcing social responsibility.
According to estimates, the new GST structure could lead to a short-term revenue loss of ₹4.77 lakh crore, as flagged by West Bengal finance minister Chandrima Bhattacharya. However, the Centre argues that the loss will be offset by higher consumption, improved compliance, and stronger economic growth driven by lower household and business costs.
Experts believe the reform is well-timed ahead of the festive season, ensuring that consumer demand in sectors like FMCG, automobiles, real estate, and durables gets a significant boost. Markets responded positively, with the Sensex and Nifty opening higher after the announcement, and auto, infra, and FMCG stocks rallying.
FMCG & Consumer Companies welcomed the rate cuts, calling them a win for rural affordability and demand revival.
Auto manufacturers hailed the reduced 18% rate on small cars and bikes, predicting stronger sales in the coming quarters.
Real estate developers appreciated lower GST on cement and construction materials, which will improve housing affordability.
Healthcare leaders called insurance exemption a landmark step toward universal health coverage.
Market analysts noted that while consumer sectors gain, the long-term success depends on companies passing benefits to consumers and government balancing fiscal impact.
In her announcement, Finance Minister Nirmala Sitharaman stressed that these reforms were undertaken with the common man at the centre, ensuring affordability and fairness. Prime Minister Narendra Modi also welcomed the move, calling it a step toward making GST simpler and more growth-oriented.
Economists believe that GST 2.0 could serve as a growth engine for India’s economy, much like the initial GST rollout did in 2017. By cutting taxes on essentials, encouraging consumption, supporting housing, and simplifying compliance, this reform aligns with the government’s broader vision of an inclusive, consumption-driven economy.
At the same time, maintaining higher taxes on luxury and harmful products ensures fiscal balance and aligns with public policy goals.
The rollout of GST 2.0 marks a turning point in India’s indirect tax journey. By rationalising slabs to 5% and 18%, exempting insurance and essential healthcare, cutting rates on daily-use items, and keeping sin/luxury goods under 40%, the Council has created a simpler, fairer, and consumer-friendly tax regime.
The impact will be felt across households, businesses, and industries, with lower costs, higher demand, and improved affordability. While revenue concerns remain, the long-term outlook suggests that this reform could fuel growth, strengthen compliance, and make GST truly reflective of its original intent — “One Nation, One Tax”.
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