Why Reform Was Long Anticipated
For years, consumers have borne the brunt of high Goods and Services Tax (GST) rates on cars, insurance premiums, and even everyday essentials. Small cars, typically chosen by budget-conscious families, currently attract 28% GST, while insurance premiums draw an 18% levy, making both out of reach for many households. The pressure has been mounting for reforms that make essential and aspirational items more affordable. Prime Minister Narendra Modi, in his Independence Day address, termed the forthcoming overhaul as a “next-generation GST reform” — one expected to reduce costs for millions of Indians.
The Reform Framework: Two Slabs and a Sin Tax
The government is preparing what could be the most sweeping tax restructuring since GST was introduced in 2017. Sources have confirmed that under the new proposal, only two major slabs will remain: 5% and 18%. Goods currently taxed at 12% or 28% will be shifted to these categories.
A special 40% “sin tax” will apply to just five to seven items — including tobacco and luxury products — ensuring revenue stability while keeping the structure simpler. Importantly, up to 90% of items now under the 28% slab will move to 18%, and a large portion of goods taxed at 12% will fall to just 5%.
For consumers, this translates to a broad reduction in prices across categories ranging from vehicles and appliances to household goods and health insurance.
Daily-Use Items: What Could Get Cheaper
While the final list is being worked out, indications suggest a wide range of everyday goods may soon be taxed at just 5%. These could include:
· Toothpaste, hair oil, and processed foods
· Umbrellas, pressure cookers, small washing machines, and sewing machines
· Readymade garments priced over ₹1,000 and footwear between ₹500–1,000
· Bicycles and agricultural tools
· Vaccines, stationery items such as notebooks and geometry boxes
· Mobile phones and computers — now essential for education and work
For slightly larger consumer durables, the 18% slab will apply. This bracket could cover televisions, refrigerators, air conditioners, washing machines, aerated water, and construction materials like cement and ready-mix concrete.
Such rationalisation not only simplifies compliance but also promises relief to households where rising costs of living have weighed heavily.
Small Cars: Reviving a Struggling Segment
One of the most significant proposals is the reduction of GST on small cars — defined as petrol cars under 1200cc and diesel cars under 1500cc, not exceeding four meters in length — from 28% to 18%.
Sales in this category have slowed in recent years as customers shifted towards feature-packed SUVs. Small cars, which once made up nearly half of passenger vehicle sales, accounted for only one-third in the last fiscal year.
Maruti Suzuki, long the leader in this segment with models like Alto, WagonR, and Dzire, has seen its market share dip from over 50% to 40% in five years. The proposed tax cut could revive demand, benefiting Maruti most, alongside Hyundai and Tata Motors.
Insurance Sector: Expanding Coverage
The government is also considering slashing GST on health and life insurance premiums to 5%, or even exempting them entirely. This would be a big shift from the current 18%.
India’s insurance penetration remains at 3.8% of GDP, among the lowest globally. Lower taxation could make premiums more affordable, encouraging more families — particularly in rural and semi-urban regions — to purchase health and life cover. Insurers like SBI Life, ICICI Prudential, and LIC have already seen stock prices jump in anticipation.
Stock Market Cheers the Move
The announcement sparked immediate gains in equities. The Nifty index climbed 1.3% on Monday, marking its best session in three months. Auto and insurance stocks led the rally, with Maruti, M&M, Bajaj Auto, Hero MotoCorp, and Eicher Motors rising between 2% and 8%. Insurance companies gained 2–4%.
Market analysts argue that reforms will “enhance affordability, stimulate consumption, and bring a wider section of the population into the fold of essential products.”
A Reform That Touches Every Household
If approved by the GST Council in its upcoming meeting, these reforms could become effective by October — just ahead of Diwali, a period when consumer spending traditionally spikes.
For the middle class, cheaper small cars, reduced insurance premiums, and lower taxes on household goods would offer tangible relief. For businesses, from carmakers to insurers to FMCG firms, the reform signals renewed demand.
While concerns remain about revenue losses for the government, the new framework balances this with higher taxes on luxury and “sin” goods. More than a tax change, it represents a strategic effort to put money back in people’s pockets, stimulate growth, and simplify India’s complex tax system.
If carried through, this “next-generation” reform could become one of Modi’s most impactful economic moves — easing living costs while bolstering confidence in India’s growth story.
(With agency inputs)
