Eight years after its historic rollout in 2017, India’s Goods and Services Tax (GST) has entered a new chapter of transformation. In its 56th meeting held in New Delhi on September 3, 2025, the GST Council, chaired by Union Finance Minister Nirmala Sitharaman, approved a sweeping package of reforms. The decisions are aimed at rationalising tax rates, reducing the burden on households, correcting structural distortions that have long troubled industries, and simplifying compliance for businesses.
The outcome of this meeting is being described as “GST 2.0” a next-generation version of India’s indirect tax system. It collapses multiple rates into a simpler structure, exempts essential health and insurance products from taxation, reduces levies on food, personal care, medicines, and household items, and introduces a new 40 percent tax slab exclusively for luxury and sin goods.
Prime Minister Narendra Modi welcomed the reforms, calling them “citizen-centric and forward-looking.” He stressed that the measures would benefit the “common man, farmers, MSMEs, women, youth, and small businesses.”
The new rates take effect from September 22, 2025, which coincides with the first day of Navratri. The symbolic timing is deliberate. Navratri marks the beginning of India’s festive season, when consumer spending typically spikes.
Key features of the 56th GST council meeting
1. Move towards a simpler slab structure
Since its launch, one of the biggest criticisms of GST has been its complicated multi-slab structure. The old system had four key rates of 5 percent, 12 percent, 18 percent and 28 percent, along with numerous exemptions. This often caused confusion and disputes. A classic example was whether a paratha should be taxed like a simple roti at 5 percent or as a ready-to-eat packaged food at 18 percent.
To address such issues, GST 2.0 has collapsed the old structure into three clear slabs. There is now a 5 percent “merit rate” for essentials and mass-consumption items, an 18 percent “standard rate” for most goods and services, and a new 40 percent “demerit rate” reserved for sin goods and ultra-luxury consumption such as big cars, SUVs, yachts, private aircraft, and tobacco products.
This rationalisation is designed to make GST simpler, more predictable, and easier to comply with, while also reducing the scope for classification disputes and lengthy litigation.
2. Relief in health and insurance
For the first time since GST was introduced, life and health insurance have been exempted from the tax net. This is a landmark step because India has one of the lowest insurance penetration levels in the world, partly due to high costs.
Individual life insurance policies, including term plans, ULIPs and endowment schemes, will now be GST-free. Health insurance policies, such as family floaters and senior citizen plans, are also exempt. Even reinsurance premiums have been freed from tax.
This directly lowers the cost of premiums and could encourage millions of households to finally purchase coverage. For a country that has struggled with low financial security and high out-of-pocket health expenses, the decision is expected to be transformative.
3. Everyday essentials get cheaper
The Council has delivered direct relief on household expenses by reducing taxes on daily-use goods. Paneer, packaged ultra-high temperature milk, and Indian breads such as roti, paratha and even pizza bases will now attract no GST at all.
A wide range of packaged food items including butter, ghee, dry fruits, jams, fruit juices, namkeen, cornflakes and biscuits have seen tax rates slashed from 12 to 18 percent down to just 5 percent. Personal care items like shampoo, soap, hair oil, toothpaste and talcum powder, which earlier attracted 18 percent GST, are now placed in the 5 percent bracket.
For the average middle-class family, these changes will translate into noticeably lower monthly grocery and personal care bills.
4. Automobiles and white goods rationalised
GST 2.0 has sought to balance affordability for middle-class consumers with higher taxation on luxury goods. Small cars with petrol engines up to 1200 cc, diesel engines up to 1500 cc and length up to four metres will now be taxed at 18 percent instead of the earlier 28 percent. Two-wheelers under 350 cc will also move to the 18 percent slab.
Appliances such as air conditioners, televisions, dishwashers and cement, which is critical for housing and infrastructure, will all be taxed at 18 percent instead of 28 percent.
On the other hand, the luxury segment has been hit with the new 40 percent slab. Big cars, SUVs, motorcycles above 350 cc, yachts, racing cars and private aircraft will all fall in this category, making them significantly more expensive.
This structure ensures that mass-market mobility and household goods become more affordable, while luxury consumption is taxed heavily.
5. Boost to agriculture, labour-intensive industries and renewable energy
The Council has provided targeted relief to sectors that are critical for employment and rural livelihoods. Agricultural machinery and tractors, earlier taxed at 12 percent, will now attract only 5 percent GST. Handicrafts, marble and leather goods too have been reduced to 5 percent, providing a boost to artisans and small-scale producers.
Renewable energy devices, including solar panels and wind turbines, have been placed in the 5 percent bracket, encouraging India’s transition to green energy. Fertiliser inputs such as sulphuric acid, nitric acid and ammonia have also been cut to 5 percent, which will directly reduce the cost of farming for millions of cultivators.
6. Medicines and health supplies
Healthcare has emerged as one of the biggest winners from the reforms. Thirty-three life-saving drugs have been exempted entirely from GST. All other medicines will now be taxed at only 5 percent.
Medical devices such as diagnostic kits, bandages, gauze and glucometers also move to the 5 percent bracket. Combined with the exemption for insurance premiums, these steps mark a major stride towards making healthcare affordable and accessible.
7. Services become cheaper
Several everyday services will now be easier on the pocket. Gyms, salons, barber shops and yoga classes will all be taxed at 5 percent instead of 18 percent. Hotel stays priced below Rs 7,500 per night will now attract only 5 percent GST, down from 12 percent earlier.
This means wellness, grooming and budget travel will become more affordable for the middle class.
8. Correcting inverted duty structures
Industries such as textiles and fertilisers have long complained of “inverted duty structures,” where raw materials were taxed more than finished goods. This created working capital blockages and frequent disputes with tax authorities.
GST 2.0 corrects this distortion. The GST rate on manmade fibre has been cut from 18 percent to 5 percent, while manmade yarn has been reduced from 12 percent to 5 percent. These changes are expected to improve cash flows and ease compliance for businesses.
9. Strengthening GST institutions
The Council has also approved the long-awaited operationalisation of the Goods and Services Tax Appellate Tribunal (GSTAT). The tribunal will begin accepting appeals by September 2025 and start hearings from December 2025.
This creates a proper mechanism for taxpayers and businesses to resolve disputes, offering much-needed relief after years of uncertainty.
10. Sector-wise implications
For households, the biggest gain is immediate. Cheaper groceries, medicines, personal care products, insurance premiums and services all translate into meaningful monthly savings.
The automobile sector will see a revival in the mass market segment, as small cars and two-wheelers become more affordable. At the same time, luxury car and SUV buyers will face significantly higher costs.
In housing and real estate, lower GST on cement could bring down construction costs, giving relief to homebuyers and builders. Healthcare has received a historic boost with both insurance and medicines becoming cheaper, making coverage and treatment accessible to more people.
Farmers and the rural economy will benefit from lower taxes on fertilisers, tractors and farm machinery, which reduce input costs. The renewable energy sector will gain from cheaper solar panels and wind devices, aligning with India’s climate commitments.
For MSMEs and small businesses, fewer slabs, lower rates and the establishment of GSTAT mean lower compliance costs and quicker dispute resolution.
Revenue impact and state concerns
Not everything is smooth sailing. States have expressed concerns over the fiscal implications of these sweeping rate cuts. Their internal estimates suggest revenue losses between Rs 80,000 crore and Rs 1.5 lakh crore.
The Union Government, however, has projected a lower impact of around Rs 48,000 crore. Revenue Secretary Arvind Shrivastava clarified that this is “not a loss, but an implication” and assured that fiscal sustainability will be protected.
Finance Minister Nirmala Sitharaman described the reforms as being designed with “a focus on the common man.” The timing of the reforms, just before state elections and ahead of the Union Budget cycle, is politically significant. By reducing the tax burden on households and small businesses, the government has positioned itself as responsive to citizens’ needs.
Economically, the reforms do more than cut rates. They simplify the GST system, reduce classification disputes and strengthen compliance. For businesses, fewer slabs mean fewer arguments with tax officers and easier filings.
While states are concerned about short-term revenue loss, the Centre believes that higher consumption and improved compliance will expand the tax base and stabilise revenues over time. Lower rates, in other words, may fuel demand that ultimately benefits government coffers.
Industry response
Industry groups have welcomed the reforms enthusiastically. The Confederation of Indian Industry (CII) termed them “pathbreaking.”
Chandrajit Banerjee, Director General of CII, said: “By lowering rates on everyday items and critical inputs, the reforms provide immediate relief to families and strengthen the foundation for growth. Industry will swiftly pass on the benefits to consumers and ensure smooth rollout.”
The reforms, while ambitious, face challenges. States remain concerned about revenue management. Implementation will require businesses to update accounting systems and reconfigure pricing.
The success of the new Goods and Services Tax Appellate Tribunal will depend on how consistently and quickly it resolves disputes.
Towards a simpler GST 2.0
The 56th GST Council meeting marks a watershed moment in India’s indirect tax journey. By simplifying slabs, exempting essentials, supporting critical sectors and strengthening institutions, GST 2.0 is a step closer to becoming a truly “Good and Simple Tax.”
Challenges of revenue management and smooth implementation remain, but the reforms carry the potential to revive consumption, ease business operations and restore public confidence in GST.
As Prime Minister Modi noted, these reforms are not just about tax rates but about improving everyday life and aligning the GST system with India’s aspirations. The coming months will show how effectively GST 2.0 reshapes the economy. For now, it reflects both political resolve and economic pragmatism, a strong signal that India’s tax system is evolving with the needs of its people.
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