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India’s Goods and Services Tax (GST) framework is undergoing its most significant transformation since its launch in 2017. After years of demand from industry experts, state governments, and taxpayers, the GST Council has decided to cut down the number of tax slabs to just two—5% and 18%—with effect from September 22, 2025.
Additionally, a special 40% rate has been introduced for sin and luxury goods such as tobacco, pan masala, aerated drinks with sugar, gambling services, and luxury vehicles. This reform not only simplifies compliance but also aims to reduce costs on everyday goods for millions of households.
Why This Reform Was Needed
The original GST system had four slabs—5%, 12%, 18%, and 28%—plus exemptions and cess, creating a complex framework. Businesses faced classification disputes, consumers were often confused, and states flagged compliance loopholes.
The new two-tier structure is designed to:
- Simplify compliance for businesses across sectors.
- Lower costs for the common man on essential goods.
- Preserve revenue by shifting luxury and harmful goods to the 40% bracket.
Finance Minister Nirmala Sitharaman announced that all states unanimously backed the decision. “Every tax on the common man’s daily use items has been reviewed, and in most cases, rates have come down drastically,” she said.
Key Features of the New GST Structure
- Two main slabs: 5% and 18%.
- Special 40% rate: For sin/luxury goods, with valuation based on Retail Sale Price (RSP) to plug revenue leakages.
- 0% category expanded: Life-saving drugs, insurance, and key food items like UHT milk and roti now tax-free.
- Mass consumption items made cheaper: Toiletries, packaged food, footwear, textiles, fertilizers, and infant care goods largely moved to 5%.
- Revenue concerns: While West Bengal flagged potential losses of ₹477 billion, the Centre expects the 40% slab to offset much of the shortfall.
What Becomes Cheaper from September 22
- Household essentials: Shampoo, soaps, toothpaste, and shaving creams now at 5%.
- Food items: Chocolates, biscuits, namkeens, vegetable oils, dry fruits, and dairy products see significant rate cuts.
- Healthcare: Life-saving drugs, medical kits, diagnostic tools, and oxygen equipment are either exempt or in the 5% bracket.
- Insurance: All individual life and health insurance policies are exempt.
- Agriculture: Fertilizers, irrigation systems, seeds, and crop nutrients are down to 5%.
- Clothing & footwear: A cut from 12% to 5%, bringing relief to mass-market consumers.
Quick Reference: New GST Rate Slabs
To simplify navigation, here’s a detailed table of items under each GST slab after the Council’s reform.
| GST Rate | Categories | Examples of Items |
| 0% | Life-saving medicines & insurance | Cancer drugs, rare disease drugs, individual life insurance, health policies |
| Food essentials | UHT milk, paneer, roti, chapati, paratha, pizza bread, khakhra | |
| Education supplies | Maps, globes, pencils, crayons, sharpeners, exercise books, erasers | |
| 5% | Toiletries & personal care | Hair oil, shampoo, toothpaste, soaps, shaving cream, toothbrush |
| Dairy & packaged foods | Butter, ghee, cheese, namkeens, biscuits, chocolates, vegetable oils | |
| Infant & baby products | Feeding bottles, napkins, clinical diapers | |
| Medical products | Thermometers, oxygen, diagnostic kits, glucometers, corrective spectacles | |
| Agriculture | Fertilizers, tractor tyres, drip irrigation, sprinklers, bio-pesticides | |
| Clothing & footwear | Textiles, shoes, mass-market apparel | |
| 18% | Vehicles (mainstream) | Cars (petrol/CNG under 1200 cc, diesel under 1500 cc), motorcycles up to 350 cc, 3-wheelers, transport vehicles |
| Electronics & appliances | Air conditioners, televisions above 32”, LCD/LED TVs, monitors, projectors, dishwashers, washing machines | |
| Industrial machines | Road tractors (engine capacity above 1800 cc) | |
| 40% | Tobacco & pan masala | Cigarettes, bidis, chewing tobacco, gutkha, zarda |
| Beverages | Aerated waters with sugar, caffeinated drinks, non-alcoholic flavoured drinks | |
| Luxury goods | Motorcycles above 350 cc, yachts, aircraft for personal use, high-end cars | |
| Arms & gaming | Revolvers, pistols, casinos, betting, gambling, horse racing, online money gaming |
Impact on Different Sectors
1. Consumers and Households
Middle-class families are the biggest winners. Everyday essentials—ranging from dairy and cooking oil to toiletries and footwear—are now taxed less, lowering household budgets.
2. Agriculture and Rural Economy
Farmers benefit from cheaper fertilisers, irrigation equipment, and seeds. This is expected to improve crop productivity while reducing input costs.
3. Healthcare and Insurance
A major push for affordable healthcare—life-saving drugs are exempt, medical devices are cheaper, and insurance is tax-free. This aligns with the government’s goal of improving insurance penetration and healthcare access.
4. Manufacturing and Retail
Simplified slabs reduce classification disputes and compliance hurdles. Lower taxes on textiles, footwear, and packaged foods could spur demand, boosting production and retail sales.
5. State Revenues
Revenue shortfalls are a major concern. Some states anticipate large losses due to cuts, but the Centre argues that sin/luxury goods in the 40% bracket and better compliance will balance the books.
Political and Industry Reactions
- PM Narendra Modi hailed the move as pro-common man, highlighting its focus on affordability.
- Industry bodies such as CII and FICCI welcomed the rationalisation as long overdue, predicting improved ease of doing business.
- States like West Bengal expressed worry over revenue losses but did not oppose the changes.
Challenges Ahead
Despite its sweeping scope, the reform comes with hurdles:
- Revenue management – The Centre must compensate states for revenue losses.
- Business transition – Enterprises need to update billing systems, ERP software, and inventory classifications.
- Risk of misuse – Reclassification of food products may spark disputes (as seen earlier with “parotta vs roti” GST debates).
- Strict enforcement – The shift to RSP-based valuation for sin goods requires strong monitoring to avoid evasion.
Looking Ahead
The simplification of GST is a step toward a more efficient and citizen-friendly tax regime. The Council has struck a balance between affordability, business ease, and revenue security.
For the common citizen, this means lower prices on food, clothes, medicines, and insurance. For businesses, compliance becomes easier with fewer slabs. For the government, it ensures harmful goods remain heavily taxed while basic needs are made more affordable.
As the new structure takes effect on September 22, 2025, India moves closer to a GST system that is simpler, fairer, and more growth-oriented.
