GST Council’s Diwali Gift: Two-Tier Tax System to Boost Growth, Ease Compliance

NEW DELHI-  The 56th GST Council Meeting, chaired by Union Finance Minister Nirmala Sitharaman, approved transformative “GST 2.0” reforms aimed at simplifying India’s indirect tax structure, reducing the tax burden on households, and boosting economic growth.

The reforms, effective from September 22, 2025 (coinciding with Navratri), were described as a “Diwali gift” by Prime Minister Narendra Modi, focusing on easing costs for the common man, supporting labor-intensive industries, and enhancing compliance.

Key Highlights of the GST Reforms

1.Simplified Tax Structure: –

• The existing four-tier GST structure (5%, 12%, 18%, 28%) has been streamlined into a two-tier system of 5% (Merit Rate) and 18% (Standard Rate), with a new 40% slab for luxury and sin goods.
• The 12% and 28% slabs have been eliminated, with 99% of items in the 12% slab moving to 5% and 90% of items in the 28% slab shifting to 18%.Compensation cess has been removed, except for tobacco-related products, to simplify taxation and ensure full Input Tax Credit (ITC) eligibility.

2.Tax Reductions on Essential Goods:-

• Nil GST Rate: Ultra-high temperature (UHT) milk, paneer, all Indian breads (e.g., roti, chapati, paratha), pizza bread, khakra, and life-saving cancer drugs now attract 0%
• 5% GST Rat: Daily essentials like butter, ghee, dry nuts, namkeen, bhujia, sauces, instant noodles, coffee, chocolates, cornflakes, biscuits, ice cream, tender coconut water, 20-litre packaged drinking water, hair oil, toilet soaps, shampoos, toothbrushes, tableware, kitchenware, and bicycles have been reduced from 12% or 18% to 5%.
• Dairy and Fisheries: Fishing nets, seafood products, aquaculture inputs (e.g., diesel engines, pumps, aerators), and most dairy products now fall under the 5% slab, down from 12–18%.

3. Exemptions for Insurance:-

• Individual life and health insurance policies, including term life, ULIPs, endowment policies, family floater, and senior citizen policies, are now fully exempt from GST (previously 18%), enhancing affordability and insurance penetration.

4. Automobile and Mobility Sector: –

• Small cars (petrol/LPG/CNG: <1200 cc, <4000 mm; diesel: <1500 cc, <4000 mm), motorcycles up to 350 cc, and buses now attract 18% GST, down from 28%.
• Auto components reduced from 28% to 18%, boosting affordability.
• High-end vehicles (>1500 cc, >4000 mm), SUVs, MUVs, MPVs, XUVs (>170 mm ground clearance), and motorcycles above 350 cc are taxed at 40%.

5. Luxury and Sin Goods: –

• A new 40% GST slab applies to luxury items (e.g., high-end cars, yachts, aircraft for personal use) and sin goods (e.g., sodas, non-alcoholic beverages with added sugar, casinos, online gaming, horse racing, lotteries).
• Tobacco, cigarettes, pan masala, gutkha, zarda, and bidis retain the current 28% GST plus compensation cess until related loans are repaid, after which they will move to 40%.

6.Construction and Real Estate: –

• Cement GST reduced from 28% to 18%, potentially lowering construction costs by 3–5%, boosting affordable housing demand.
• Hotel accommodations charging >₹7,500 per day attract 18% GST, with full ITC available. The “Declared Tariff” concept has been abolished, and GST is now levied on actual transaction value.

7. Healthcare and Agriculture:

• All medical devices and instruments for medical, surgical, dental, and veterinary uses are taxed at 5%, with specific exemptions for some devices.
• Agricultural, horticultural, and forestry machines for soil preparation now fall under 18% GST, down from 28%.

8. Process Reforms: –

• Automated GST refunds and simplified registration processes to reduce compliance burdens for MSMEs.
• Pre-filled GST returns to minimize manual intervention and mismatches.
• Mandatory biometric authentication for company directors and promoters (effective March 4, 2025) and multi-factor authentication for GST portal access to enhance security.

Economic and Social Impact –

• Fiscal Impact: Estimated net fiscal cost of ₹48,000 crore, offset by expected increased consumption, reduced tax evasion, and a wider tax base. Bank of Baroda predicts a 0.2–0.3% GDP boost in FY 2025–26.
• Consumer Benefits: Lower taxes on essentials, insurance, and mobility are expected to increase disposable incomes, stimulate demand, and enhance affordability, particularly for middle-class and rural consumers.
• Industry Impact: Sectors like FMCG, automobiles, real estate, and healthcare will benefit from reduced costs and simplified compliance. FMCG companies anticipate 8–10% price reductions or increased product grammage.
• MSME and Business Support: Simplified tax slabs and faster refunds will ease working capital constraints, encourage formalization, and support Atmanirbhar Bharat goals.
• Criticism: Congress leader P. Chidambaram called the reforms “eight years too late,” while some X users expressed concerns that the cuts may not sufficiently address underlying inflation.

Implementation and Stakeholder Reactions

Effective Date: Most changes take effect on September 22, 2025, except for tobacco-related products, which will transition later.

Stakeholder Support: Industry leaders like Piyush Goyal and Mukesh Ambani hailed the reforms as “game-changing,” urging businesses to pass savings to consumers. The Confederation of Indian Industry (CII) and Federation of Automobile Dealers Associations (FADA) welcomed the clarity and affordability boost.

Government Vision: PM Modi emphasized that GST 2.0 adds “five new gems” to India’s economy, aligning with the goal of becoming the third-largest economy by 2027.

Conclusion

The GST reforms of September 4, 2025, mark a significant shift toward a simpler, consumer-friendly tax regime. By reducing rates on essentials, exempting insurance, and streamlining compliance, the government aims to boost consumption, support MSMEs, and counter external economic pressures like U.S. tariffs. While broadly welcomed, the reforms face scrutiny over their timing and sufficiency in addressing inflation. The changes are poised to reshape India’s economic landscape, with a focus on affordability, growth, and ease of doing business.