A New Chapter in Tax Reform
Since its launch in 2017, the Goods and Services Tax (GST) has been hailed as India’s most significant tax reform. Yet, the four-tier rate structure often left businesses grappling with classification disputes and consumers puzzled over pricing. With GST 2.0 coming into effect on September 22, 2025, the government has redrawn the framework to make it leaner, clearer, and more consumer-friendly.
The revamped system introduces two main tax slabs—5% and 18%—alongside a steep 40% levy for luxury and sin goods. By streamlining the rates, the government expects GST 2.0 to reduce compliance hassles, limit litigation, and ultimately lower the cost of everyday essentials for households. Prime Minister Narendra Modi has framed the change as the beginning of a “Bachat Utsav” or festival of savings.
The earlier four slabs of 5%, 12%, 18%, and 28% often created confusion and inconsistencies. GST 2.0 simplifies this structure:
· 5% rate for essentials and daily-use goods such as food grains, medicines, dairy products, and education materials.
· 18% rate for most standard goods and services including manufacturing, transport, and consumer services.
· 40% rate for ultra-luxury items and sin goods like tobacco, pan masala, high-end cars, casinos, and online gaming.
By merging categories and clarifying classifications, policymakers expect smoother compliance and fewer disputes between tax authorities and businesses.
What Becomes Cheaper
Several categories of goods and services are now set to cost less under the revised structure:
· Food and dairy: UHT milk, chapatis, parathas, and parottas are exempt. Butter, ghee, paneer, and cheese are taxed at 5%. Packaged foods like pasta, biscuits, chocolates, and namkeens move to 5%.
· Dry fruits and sugar products: Almonds, cashews, and pistachios drop from 12% to 5%. Refined sugar and confectionery also fall into the 5% slab.
· Healthcare and education: Life-saving drugs, medical devices, and books will be either tax-free or taxed at 5%.
· Consumer durables: Washing machines, dishwashers, and televisions shift from 28% to 18%. Toiletries such as hair oil, shampoos, and toothpaste move to 5%.
· Automobiles: Small cars and two-wheelers up to 350cc now face 18% instead of 28%. Life and health insurance policies become tax-free.
· Housing and agriculture: Fertilisers, seeds, and construction materials are taxed at 5%.
· Services: Hotel tariffs below ₹7,500 now attract 5% instead of 12%, while economy air tickets are taxed at 5%.
What Gets Costlier
At the same time, GST 2.0 raises levies on certain categories:
· Luxury and sin goods: Cigarettes, gutkha, pan masala, aerated drinks, and luxury cars are taxed at 40%.
· Coal: Moved from 5% to 18%, raising input costs for coal-based industries.
· Leisure and gaming: Casinos, horse racing, lottery, and IPL tickets also fall under the 40% bracket.
These changes reflect the government’s attempt to balance affordability for households with higher levies on discretionary and socially harmful consumption.
Will Benefits Reach Consumers?
While many companies—from Toyota and Mahindra to FMCG majors like HUL and Amul—have announced price cuts, the bigger test lies in ensuring these reductions reach store shelves. Past experience is sobering.
A LocalCircles survey of 19,000 consumers found that only 18% felt they benefited from earlier GST rate cuts. Many said manufacturers avoided lowering MRPs, while retailers kept prices unchanged despite lower taxes. This scepticism lingers, raising doubts over whether GST 2.0 will genuinely lighten household budgets.
Experts argue that robust monitoring mechanisms are essential to prevent profiteering and ensure that reduced taxes translate into lower consumer prices.
Broader Economic Impact
Beyond individual shopping bills, GST 2.0 is designed to widen the tax base and simplify compliance. By reducing classification disputes, it could ease the burden on businesses, lower administrative costs, and increase voluntary compliance.
For households, cheaper essentials, education, and healthcare can increase disposable income, potentially boosting consumer demand. For industries, clearer tax rates reduce litigation and allow for better pricing strategies. Over time, these changes may also enhance investor confidence by signaling policy stability.
Promise of a Fairer, Simpler System
GST 2.0 represents a deliberate move towards simplicity, predictability, and fairness. Its success, however, hinges on whether businesses faithfully pass on savings to consumers. If they do, households could see genuine relief, spending power may rise, and economic growth could gain momentum.
By taxing luxuries and harmful goods more heavily while easing the burden on essentials, the reform also signals a progressive approach to taxation. If effectively implemented and monitored, GST 2.0 could become a cornerstone of India’s fiscal architecture—delivering both economic efficiency and tangible benefits for everyday citizens.
(With agency inputs)
