New Delhi: Finance Minister Nirmala Sitharaman announced sweeping reforms to India’s Goods and Services Tax (GST) framework after the 56th GST Council meeting, introducing a revolutionary two-slab structure that would fundamentally reshape the indirect taxation system.
The GST Council unanimously approved collapsing the existing four-tier structure (5 percent, 12 percent, 18 percent, and 28 percent) into a simplified two-slab system of 5 percent and 18 percent, effective 22 September—coinciding with the start of Navaratri. A special demerit rate of 40 percent will apply to select goods and services.
This structural shake-up is a bid to boost domestic consumption, ease compliance, and deliver relief for the common citizen, all at a moment of heightened trade pressures from the Trump tariffs.
“These reforms have been carried out with a focus on the common man. Every tax on the common man’s daily use items has gone through a rigorous review and in most cases the rates have come down drastically,” Sitharaman explained Wednesday, addressing the media at a press conference after the GST council meeting
The timing of these reforms is particularly strategic as India grapples with elevated US tariffs of up to 50 percent imposed on the majority of Indian imports. Analysts suggest this consumption-boosting measure will help mitigate the impact of Trump’s trade policies by strengthening domestic demand. Goldman Sachs has already revised India’s GDP growth forecast upward to 7.3 percent for 2025, factoring in both the adverse effects of US tariffs and the positive impact of domestic reforms.
The GST restructuring is expected to stimulate private consumption during the festive season, leading up to Diwali, providing a crucial buffer against external economic headwinds.
In addition to tax rate reforms, the GST Council announced the operationalisation of the Goods and Services Tax Appellate Tribunal (GSTAT). The tribunal is set to begin accepting appeals by the end of September and start hearings before the close of the year, with all backlog appeals required to be disposed of by June 2026.
This move is aimed at expediting dispute resolution and promoting a more business-friendly environment. Other notable changes include a uniform 18 percent GST rate on all auto parts and reductions in tax rates for three-wheelers, buses, trucks, and ambulances. Renewable energy devices and hotel accommodations costing up to Rs 7,500 per night will attract a reduced rate of 5 percent.
Garima Kapoor, executive vice president, Elara Capital, said that the GST rate changes look favourable especially since there is across the board decline in daily use items, including services like hotel rates below Rs 7500.
What gets cheaper, what gets costlier
The GST reforms announced will make a broad range of items more affordable while pushing up the prices of select goods classified as luxury or “sin goods.” Everyday essentials such as roti, paratha, hair oil, soaps, toothpaste, and bicycles will become cheaper as they move to the lower 5 percent GST slab, down from previous rates of 12 percent or 18 percent. Several packaged food items, including jams, honey, pasta, namkeen, and processed foods, also see their rates reduced, making them less expensive for consumers.
A major shift is the exemption of ultra-high temperature (UHT) milk, pre-packaged paneer, and Indian breads (paratha, khakra, chapati) from any GST, effectively making these items tax-free.
The government has also made 33 essential drugs, including those required for cancer and rare diseases, GST-free, while reducing the tax rate to 5 percent for other medical goods.
Agricultural and labour-intensive sectors such as tractors, machinery, handicrafts, and leather goods will benefit from a rate reduction from 12 percent to 5 percent. Efforts to correct inverted duty structures in textiles and fertilisers are expected to support manufacturing and exports.
On the flip side, luxury vehicles (with large engine size), motorcycles above 350 cc, carbonated drinks, and caffeinated beverages will be costlier under the newly introduced 40 percent GST slab. Tabocco products continue to stay in the highest slab, reflecting their status as sin goods.
Electronics and household appliances like ACs, televisions, refrigerators, and washing machines move down from 28 percent to 18 percent. Similarly, most small cars, three-wheelers, buses, and transport vehicles will also be taxed at 18 percent, reducing ownership and operational costs for consumers and businesses alike.
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Revenue impact
The GST Council estimates a total revenue loss of Rs 47,700 crore due to the rate rationalisation. However, other reports suggest the impact could be as high as Rs 93,000 crore. West Bengal Finance Minister Chandrima Bhattacharya confirmed the Rs 47,700 crore figure, highlighting concerns among state governments about fiscal implications.
Karnataka has projected an annual shortfall of Rs 15,000 crore in state revenue, with Revenue Minister Krishna Byre Gauda demanding additional compensation mechanisms. Jammu and Kashmir Chief Minister Omar Abdullah warned of a potential 10-12 percent reduction in the Union Territory’s GST revenues.
However, the government opines that the estimated Rs 48,000 crore revenue gap cannot be considered a loss. “It would not be correct to term it a revenue loss,” Revenue Secretary Arvind Shrivastava said at the GST press conference.
The lower tax would mean more money in hand for the common man, and the government is expecting a boost in expenditure, which would route it directly back into the economy.
Shrivastava said the government believes that this will be fiscally sustainable. There will be financial buoyancy and compliance will be higher, he said. “We do not expect any major fiscal implication.”
Sitharaman, too, echoed a positive tone towards the unanimous decision. “I think it will have a very positive impact on the GDP… Key drivers of the economy have been given prominence.”
Sectoral impacts
The GST reforms bring significant relief for buyers of small petrol and diesel cars. Vehicles with petrol engines up to 1,200cc and diesel engines up to 1,500cc, along with a length below 4 meters, will now attract an 18 percent GST rate, down from the previous 28 percent slab. This cut is expected to reduce prices for popular models such as Maruti Swift and Hyundai i10 by 5-7 percent, potentially boosting sales during the festive season.
Conversely, larger vehicles and luxury cars are set to face higher tax rates. Cars longer than 4 meters with petrol engines above 1,200cc or diesel engines above 1,500cc will now fall under a new 40 percent GST slab. However, to moderate the overall impact, the additional cess that was previously applied—ranging from 15 percent to 22 percent—has been reduced. This ensures that while the nominal GST rate has increased sharply, the net tax burden remains around 50 percent, cushioning the effect somewhat compared to the headline increase.
For high-end electric vehicles, the tax hike could slow growth in this segment. Luxury EVs and larger hybrids are now subject to the higher 40 percent GST rate, whereas smaller electric vehicles continue enjoying the 5 percent rate, highlighting the government’s push for direct EV adoption over hybrids.
Similarly, the reduction in GST on cement could prove to be a good push to the infrastructure sector. “Very critical items like cement have seen a cut from 28 percent to 18 percent which should be a huge positive for the infra sector. The efforts to further ease the compliance burden on tax filers is positive and should aid ease of doing business,” Elara Capital’s Kapoor said
The farming and allied sectors, especially, are expected to benefit from the reforms.
“The recent announcement of the GST reform package will have a significant impact on the Indian economy including the agriculture and allied sectors. Reducing the GST rates on farm machinery and fertiliser inputs—from the current 12 percent (machinery) and 18 percent (fertilizer inputs like ammonia) to just 5 percent and even reducing the GST rates on many food items from 5 per cent to nil or from higher slabs to 5 percent is expected to give a boost to rural demand, ease off cost pressures on producers which in turn will have a cascading impact on the economy especially in rural India,” said Soumyak Biswas, Partner, Food & Agribusiness, Management Consulting, global financial firm BDO India
The GST rate changes, along with RBI’s rate cuts, income tax rebates announced in FY26 budget and easing inflation are all levers for a consumption uptick in the economy, Kapoor said.
“We expect the GST-related demand boost to add 100 to 120 bps to the GDP growth over next four-six quarters, thereby nullifying the negative impact of higher tariffs on exports to the US. We remain constructive on the uptick in consumption demand in the economy as multiple policy levers turn favourable for the first time in a decade,” she added.
(Edited by Tony Rai)
Socialist Modi is still unable to let go of 40% GST. I wonder what vote catching socialist scheme will be funded with the sin of smokers and drinkers.