GST gets a makeover: 2 slabs, lower prices and simpler system
New Delhi: In one of the most sweeping tax reforms since the introduction of the Goods and Services Tax (GST) in 2017, the GST Council on Wednesday approved a complete restructuring of the indirect tax system. The overhaul will come into effect on September 22, coinciding with the start of Navaratri, and is expected to lower prices across a wide spectrum of goods and services, while reducing the burden of compliance for businesses.
The decision trims down the existing four-slab structure of 5, 12, 18 and 28 per cent to just two principal rates — 5 per cent and 18 per cent. A separate 40 per cent bracket will apply only to a limited set of luxury and “sin” goods such as high-end cars, tobacco, aerated sugary drinks, racing cars, and yachts.
Prime Minister Narendra Modi said that wide- ranging reforms approved by the GST Council will improve lives of citizens and ensure ease of doing business for all, especially small traders and businesses.
Union Finance Minister Nirmala Sitharaman, who briefed reporters after the day-long meeting, said, “Every decision taken by the Council today was unanimous. No state registered any opposition. This is a significant step in simplifying the tax regime and making it more citizen-friendly.”
Revenue Secretary Arvind Shrivastava added that the reforms, which will cost the exchequer an estimated Rs 48,000 crore, remain fiscally sustainable.
Relief for Households
Household budgets are set to see immediate relief, with GST on a range of daily-use products being slashed. Basic food items including roti, paratha, pizza bread, khakra, paneer, and ultra-high temperature milk will now be exempt from tax. The Council has also decided to bring packaged butter, ghee, cheese, jams, dry fruits, fruit juices, confectionery, namkeens, ice cream, pastries, and biscuits into the 5 per cent slab, down from the earlier 12 or 18 per cent.
Toiletries and personal care items have seen some of the most notable reductions. Shampoo, soap, toothpaste, hair oil, face powder, talcum powder, and toothbrushes — previously taxed at 18 per cent — will now fall under the 5 per cent rate. Erasers, maps, sharpeners, and exercise books, which were taxed at 5 per cent, have been exempted altogether.
“This is a much-needed relief for families struggling with rising household costs,” said a senior government official, noting that the reforms will translate into immediate savings for consumers.
Insurance and Healthcare: A Big Shift
The Council has moved to make health and life insurance more affordable by eliminating GST on all individual policies. Previously, insurance premiums attracted 18 per cent GST, which significantly added to costs. Officials said the removal of tax will reduce premiums and encourage more citizens to opt for insurance.
Medical products too will see reduced taxation. Thermometers, diagnostic kits, reagents, test strips, and corrective spectacles have all been shifted to the 5 per cent slab. The move, government representatives said, is intended to ease healthcare expenses, particularly for those requiring regular medical monitoring.
Education Materials at Nil Rate
The overhaul also targets educational products, with several stationery and learning materials exempted from GST. Maps, charts, globes, pencils, crayons, pastels, notebooks, and exercise books have all been shifted to the Nil category.
Officials said the decision would directly benefit families with school-going children and reduce costs for small stationery manufacturers.
Benefits for Farmers and Agriculture
Agriculture, which employs nearly half of India’s workforce, has received targeted relief. The GST rate on tractors has been reduced from 12 per cent to 5 per cent. Tractor tyres and parts, previously in the 18 per cent bracket, will now also attract only 5 per cent.
Other critical farm inputs such as bio-pesticides, micronutrients, drip irrigation systems, and sprinklers will also move from 12 per cent to 5 per cent. Agricultural and forestry machinery used for cultivation, harvesting, and soil preparation will benefit from the same rate reduction.
According to officials, these changes will lower input costs for farmers, encouraging wider adoption of efficient farming technologies.
Cement, Automobiles, and Consumer Electronics
Cement, a key input for the construction industry, has seen a major cut from 28 per cent to 18 per cent, a move likely to bring down costs in the housing sector.
In automobiles, hybrid petrol and CNG cars with engine capacity not exceeding 1,200 cc and length up to 4,000 mm, as well as diesel hybrids up to 1,500 cc, will now be taxed at 18 per cent, down from 28 per cent. Motorcycles with engines up to 350 cc also move to 18 per cent.
High-end automobiles, however, will face higher taxes. Cars above 1,200 cc and longer than 4,000 mm, motorcycles above 350 cc, and luxury vehicles such as yachts and aircraft for personal use will be charged at 40 per cent. Aerated sugary drinks will also attract the 40 per cent levy.
For consumers, several electronics are set to become more affordable. Air conditioners, televisions above 32 inches, projectors, and dishwashers will now attract 18 per cent GST, down from the current 28 per cent. Industry analysts expect a surge in demand during the festive season as prices drop.
Continued Higher Levy on Tobacco Products
Tobacco, gutkha, and related products will remain taxed at 28 per cent, along with an additional compensation cess. Sitharaman clarified that this structure will continue until loans taken to compensate states for revenue losses are fully repaid.
Digital and Service Sector Adjustments
In services, the supply of third-party insurance for goods carriages will now be charged at 5 per cent with input tax credit (ITC), down from 12 per cent with ITC. Casino services, online money gaming, horse racing, and race clubs will attract the highest rate of 40 per cent.
Compliance and Refund Simplification
Beyond rate changes, the Council also approved procedural reforms to ease compliance. Automatic registration will now be granted within three working days for applicants identified through data analytics. Provisional refunds will be issued faster under a system-driven risk evaluation model.
Officials said the measures are intended to reduce delays in refunds, particularly for exporters and small businesses facing cash flow challenges.
Broader Economic Context
The sweeping reform follows Prime Minister Narendra Modi’s Independence Day announcement that GST would be made simpler and more citizen centric. India’s export sector is currently grappling with a steep 50 per cent tariff imposed by the United States — the highest globally.
The government is banking on domestic consumption to buffer the economy against this external shock. Private consumption accounted for 61.4 per cent of nominal GDP last fiscal. Economists project the GST overhaul could boost growth by up to half a percentage point within two years, offsetting the tariff’s impact.
Prime Minister Modi hailed the reform as a “Diwali gift” to the nation, stating, “Everyday items will become cheaper, small businesses will benefit, and the economy will get a fresh boost.”
With the reforms set to take effect on September 22, both businesses and consumers are preparing for a reset in pricing. Retailers anticipate increased footfall during the festive season, while industry representatives expect stronger demand in sectors ranging from consumer goods to automobiles.
