During its 56th meeting on Goods and Services Tax, the Goods and Services Tax Council, led
by Union Finance Minister Nirmala Sitharaman, unveiled an ambitious reform to India’s taxation
regime that will take place on September 22, 2025. Dubbed GST 2.0, this reform will simplify
India’s current four-slab structure to a three-slab system more commonly seen in countries
across the world. The intention is to make the GST tax system easier for consumers and
businesses alike to navigate, to realign the rates across goods and services to make essential
products easier to buy, and to operationally simplify the tax regime. The reforms, which have
been in the works for a number of months, represent yet another move towards a frontal and
rational tax regime in India, across an entire gambit of transactions – from groceries to
expensive purchases.
The New GST Rates: A Comprehensive Breakdown
The revised rates have resulted in significant changes, with many items transitioning from
higher tax brackets to lower brackets. This restructuring is intended to promote clarity and
predictability for consumers and manufacturers while also consolidating a variety of goods and
services into logical categories.
0% GST: Zero Tax on Essentials
This represents perhaps the most important shift, as a number of essential items that were
previously charged a standard rate of tax have now been transferred to the zero tax bracket.
Items such as pre-packaged paneer, roti, chapati and pizza bread that were previously charged
5% tax, are now free of any tax at all. This, combined with the removal of notebooks, pencils
and other items in the stationery category means families have saved a significant amount of
money. This change is a direct response to the demand for making the basic needs of the
population affordable.
5% GST: The New Standard for Everyday Items
The 5% category has been expanded to include many personal care items such as toothpaste,
hair oil, and soaps, that were previously priced at an 18% GST, resulting in significant savings
for consumers. In addition, dairy products like butter, ghee, and cheese, previously at 12%,
have also been brought down to 5%, which is appreciated by consumers. This simplification has
been extended to the services sector as well. Services provided by salons, gyms, and yoga
classes, which were previously at 18%, are now at 5% which is more affordable for the common
person.
18% GST: A Major Win for Consumers
The 18% tax category has officially taken over as the mass standard, and a considerable
number of consumer durables has been moved into that category, resulting in a significant
reduction to the consumer. Any items considered consumer durables, such as flat-screen
televisions for example, small split air-conditioning units and refrigerators, were previously at an
exorbitant 28% have now been dropped to 18%. The whole premise is to entice spending and
stimulate the economy by purchasing high-ticket items. Not only that, but even small cars (under
4M) and motorcycles up to 350cc in the transportation category have been reduced from 28% to
18%, as an attempt to revive the automobile sector. Even one of the most essential construction
products, cement, which is also at 28% has now been made 18% in order to lower building
costs.
40% GST: A New Slab for Luxury and Demerit Goods
The most significant introduction is a 40% demerit rate that applies to a limited list of items
previously in the 28% slab with an additional cess. Luxury cars are included, along with demerit
goods as they are called (tobacco, cigarettes, and aerated drinks, etc.). This tax bracket serves
two purposes – one is to discourage the demand for those items deemed harmful, and two is to
create a strong revenue stream for the government at a time when the need for tax cuts on
essentials can be satisfied. This is a large increase for those categories, but it is consistent with
how non-essential luxury and sin items are taxed around the world and replaces a more
complicated system with a much simpler one.
The New Income Tax Regime: A Parallel Reform
Meanwhile, the government has taken an active role in encouraging the new income tax regime
as the default approach. With lower tax rates in return for most deductions not permitted, the
new regime has become even more appealing with a higher basic exemption limit and a larger
rebate. For the average taxpayer, this translates to income up to a much higher limit being
effectively tax-free under the new regime. This fundamental change represents a philosophical
change in taxation away from a convoluted deduction-based approach that disproportionately
benefits those who can afford financial planning, to a simpler, more fair approach for all.
Conclusion
These GST and direct tax changes work together to create a more efficient fiscal policy intended
to boost economic activity, provide consumers with greater disposable income, and establish an
ecosystem that supports simple compliance for individuals and businesses alike. This is a broad
reform package to help transform India’s tax system and drive the next phase of growth for the
economy.