GST 2.0

Goods and Services Tax (GST) in India priorly featured multiple tax slabs, including 0%, 5%, 12%, 18%, and 28%, along with additional cesses on some items. While aimed at simplifying the indirect tax regime, the multiple slabs led to complexity, compliance challenges, and an uneven tax burden across sectors. Over time, calls for rationalization grew louder to enhance transparency, boost consumption, and ease the tax structure for consumers and businesses.

Effective from September 22, 2025, coinciding with the festive period of Navratri, the Indian government launched a major overhaul branded as ‘GST 2.0’. The reforms simplify GST slabs from multiple rates to two primary tax slabs of 5% and 18% with the introduction of a new 40% slab for luxury goods. UHT milk and educational stationery have been moved to a 0% (tax-exempt) category, relieving consumers of tax on daily staples. Personal care products such as toothpaste, soap, and shampoo, which earlier attracted 12% or 18%, now fall under the 5% slab, making them more affordable. Packaged foods, including biscuits, pasta, sauces, and non-carbonated beverages, similarly benefit from the reduced 5% rate.

Consumer durables and electronics, such as TVs, air conditioners, dishwashers, and cement, which were taxed at 28%, have been moved to the 18% slab, lowering prices and potentially stimulating demand. Smaller vehicles and two-wheelers now attract 18% GST, while high-end vehicles, tobacco products, pan masala, and flavored drinks are taxed at the newly introduced 40% slab, maintaining the government’s stance on sin and luxury goods taxation. Some goods, like coal and apparel priced above ₹2,500, have seen a rate increase to 18%.

In addition, the reforms address inverted duty structures in sectors such as textiles, man-made fibers, fertilizers, and chemicals by aligning input and output tax rates, thus improving compliance and easing the tax burden on manufacturers. Insurance premiums for life and health insurance have also been exempted from GST, encouraging greater insurance penetration. For the middle class, the reforms represent a meaningful move towards lowering living costs and enhancing purchasing power, especially during the festive season.

The reduction and rationalization of GST slabs have made many essential and daily-use products cheaper, benefiting the middle class in particular. This move will encourage higher consumer spending during the festive season and beyond. By simplifying the tax structure and lowering rates on mass-consumption goods, the government aims to stimulate demand, which can catalyze a virtuous cycle of increased production, investment, employment, and further consumption. Reduced GST on fertilizers, seeds, farm machinery parts, and cement is expected to lower input costs, potentially benefiting rural sectors and infrastructure development.

Although the GST rationalization is favorable, real benefits will gradually emerge. A report by HDFC Securities highlights ongoing supply chain and logistics issues, such as truck trailer shortages and rare-earth magnet supply disruptions, that currently delay growth in vehicle sales and component manufacturing.

While the GST reforms aim to simplify the tax structure and boost consumption, they have also triggered several negative short-term implications. Traders from some regions, such as Bengaluru, reported a significant decline in business, with sales dropping by around 45% in September. This downturn is attributed to customers postponing purchases in anticipation of the new, lower tax rates, leading to a temporary halt in buying activity. The period between the announcement of the rate cuts and their implementation created a gap where consumers delayed purchases, resulting in what traders describe as ‘undeclared zero business’.