When the Goods and Services Tax (GST) was launched in 2017, it promised simplicity. The goal was clear: one nation, one tax, one market. Yet over time, simplicity gave way to a maze. A patchwork of four tax slabs—5 percent, 12 percent, 18 percent, and 28 percent—meant the same toothpaste could be taxed differently from soap, and noodles differently from rice. To the layperson, it often seemed arbitrary; to businesses, it created compliance headaches.
This September, the GST Council has announced what it calls a reset. From September 22, India will transition to a two-slab system—5 percent and 18 percent—while a separate “de-merit” rate of 40 percent will apply to luxury and sin goods. This marks the most sweeping reform since GST’s inception, and the government is pitching it as “GST 2.0”—a simpler, cleaner regime meant to ease life for both the consumer and the small trader.
But will it live up to its promise? And what does it mean for the everyday Indian household?
The promise of simplicity
At its core, the two-slab model is meant to eliminate confusion. No longer will there be a 12 percent rate sandwiched awkwardly between 5 and 18 percent, leading to much derision as seen in the case of caramel popcorn.
Many goods that once occupied the “middle” slabs have now been pushed down to the lower 5 percent rate, a decision likely to soften household budgets. Items like shampoos, soaps, hair oil, and toothpaste—all staples of the common man—will now attract just 5 percent tax instead of 12 or 18.
Food items have seen the biggest relief. Packaged namkeens, pasta, chocolates, sauces, instant noodles, and even butter and ghee are being shifted to the 5 percent bracket. Ultra-high temperature milk and common Indian breads—roti, chapati, paratha—will move to a zero rate. For households that spend a large chunk of their income on food, this will bring visible savings.
Sharing his thoughts on this rejigging of GST, Manish Bandlish, Managing Director, Mother Dairy, had this to say. “We commend the Union Government’s decision to reduce GST rates on a wider range of dairy products including paneer, cheese, ghee, butter, UHT milk, milk-based beverages, and ice creams. This progressive step will significantly enhance affordability and accessibility of value-added dairy products for consumers across the country. This is a particularly big boost for packaged categories, which are fast-growing favourites in Indian homes and will see stronger demand momentum going forward.
As one of the country’s leading dairy organizations, we remain committed to ensuring that the advantages of this reform are effectively passed on to our consumers.
By lowering the tax slabs, the move will encourage wider adoption of packaged, value-added dairy products, strengthen consumer preference for safe and quality offerings, and enable more families to enjoy wholesome dairy goodness at better value. At the same time, it will create stronger market opportunities for farmers and further energise the dairy industry as a whole.”
Health and insurance also stand out. Individual life and health insurance policies will now be exempt from GST entirely. Lifesaving drugs and essential medical devices will either fall to 5 percent or to zero. In a country where out-of-pocket health expenditure remains high, this is not just a tax reform but also a social measure.
Sharing his thoughts about these rate cuts, Pratik Jain, Partner at Price Waterhouse & Co LLP, had this to say. “GST council has come up with the biggest and boldest rate cuts since introduction of GST. This will lead to significant buoyancy in demand by boosting consumption.
Since the rate cuts are applicable from September 22nd, it gives some time for industry to prepare for the changes, including mechanism to pass on the benefits to consumers. Timing of these changes couldn’t have been better, just ahead of the festive season. Diwali has come earlier for the common man.”
Echoing these thoughts, Srividya Kannan, Founder and CEO, Avaali, said that “The Next-Gen GST reforms announced by the government represent a significant step forward for India’s business ecosystem” before going on to expand on these thoughts.
“These comprehensive tax reductions across essential items and industrial inputs will create substantial cost savings and hence increase revenue, that would benefit businesses across all sectors – from the reduced rates on agricultural machinery and auto components to electronic appliances and healthcare equipment, making procurement significantly more cost-efficient for enterprises.
This creates the perfect environment for businesses to accelerate their automation initiatives. When companies can source essential equipment and operational supplies at lower costs, it frees up valuable capital that can be strategically reinvested in digital transformation and intelligent automation solutions. These reforms don’t just reduce immediate costs – they create a foundation for businesses to build their technological capabilities and drive long-term operational efficiency.”
What stays expensive
For all the relief on daily-use goods, the reforms sharpen the distinction between the ordinary and the aspirational. The highest 40 percent rate will apply to categories the Council deems a “sin” or indulgent: pan masala, cigarettes, carbonated drinks, luxury vehicles, high-end motorbikes, and even yachts and aircraft for personal use. Cars with bigger engines, imported luxury sedans, and motorcycles above 350 cc will now cost significantly more.
For the middle class, the news is mixed. Air-conditioners, washing machines, televisions, and small cars are shifting down from 28 to 18 percent, making them more affordable. But fuels like coal and lignite, previously at 5 percent, are moving up to 18. Cement, too, is now at 18 percent, down from 28 but still a significant burden in a country grappling with a housing shortage.
Pankaj Rana, CEO, Hisense India, welcomed the move to make white goods more accessible. “The government’s recent GST reforms on televisions and air conditioners come at a critical juncture. By reducing price barriers, these reforms enable a larger and more diverse consumer base, especially in emerging markets and Tier-2 and Tier-3 cities, to access high-quality, energy-efficient products. At Hisense India, our focus has always been to deliver global innovation at prices that resonate with Indian households, and this move makes our advanced range of our TVs and home appliances even more accessible ahead of the festive season, when families are looking to upgrade their homes. Ultimately, this reform not only improves affordability but also elevates the quality of life for millions of Indian households.”
The politics of reform
Announced weeks after Prime Minister Narendra Modi’s Independence Day speech, the reform has been couched in the language of empowerment and ease of living. The official press note stresses its “citizen-centric” character. Yet, as with any tax overhaul, there are trade-offs.
Revenue implications remain the big question. Moving vast numbers of items from 18 and 12 percent to 5 percent means a hit to collections, unless consumption rises dramatically. The government insists the broad 18 percent slab and the higher “sin tax” will compensate. Critics warn that with India already running fiscal pressures, the GST kitty may shrink before it expands.
Then there is federal politics. GST is a shared tax between Centre and states, and every reform needs consensus. That the Council, which includes finance ministers of all states, managed to agree on such a sweeping rationalisation is no small feat. But states dependent on compensation cess, especially those with high consumption of tobacco or alcohol, may see sharper fiscal stress.
For the ordinary citizen
For the average household, the change will be felt most immediately in grocery bills and everyday consumption. A family that buys soap, shampoo, toothpaste, packaged foods, and medicines will see relief. Eating out may not get cheaper, since restaurants largely fall in the 18 percent slab, but beauty and wellness services such as gyms, salons, and yoga centres will now be taxed at 5 percent instead of 18, a nod to middle-class lifestyles.
Insurance premiums will drop modestly, though the larger impact is psychological—insurance is now being recognised as essential, not discretionary, as it should have been for a long time. For patients battling chronic or rare diseases, the exemption on dozens of lifesaving drugs is a tangible lifeline.
The relief is less for those saving up to buy a house or a car. Cement remains relatively expensive. Small cars will get cheaper, but larger vehicles will cross into the luxury-tax bracket. Aspirational purchases—an SUV, a premium bike, even a home appliance—will remain costlier than daily necessities, and deliberately so.
The larger gamble
GST 2.0 is as much about perception as about mathematics. By cutting tax on soaps and toothpaste, the government sends a signal that it is on the side of the common man. By raising taxes on cigarettes, pan masala, and luxury vehicles, it signals disapproval of excess and indulgence. The challenge lies in execution.
A simpler system only works if compliance improves. The new slabs eliminate some of the grey zones, but classification disputes will not vanish overnight. Businesses will need clarity on whether their product belongs in the 5 or 18 percent bucket. And consumers, as ever, will be watching whether the benefits are passed on to them in the form of lower prices.
The Taxman Cometh
For now, GST 2.0 has been presented as a step towards transparency and fairness. But its success will be judged not on press releases, but on three fronts: whether state revenues remain stable, whether small businesses find it easier to comply, and whether ordinary citizens actually feel relief in their wallets.
Tax reform is never only about numbers; it is about trust. For GST to regain credibility as a “good and simple tax,” this reset will have to prove that simplicity does not come at the expense of stability.
FAQ: Your GST Questions Answered
When do the new rates apply?
The new rates come into force from September 22, 2025, with some exceptions for tobacco and related products, which will transition later.
What are the new GST slabs?
There will now be a 5 percent “merit rate,” an 18 percent “standard rate,” and a 40 percent “de-merit rate” for luxury and sin goods.
Which items get cheaper?
Soaps, shampoos, toothpaste, bicycles, packaged foods, butter, ghee, paneer, milk, medicines, insurance premiums, medical devices, small cars, ACs, and televisions will see lower tax.
Which items get costlier?
Coal, lignite, yachts, private aircraft, luxury cars, premium motorcycles, cigarettes, pan masala, and sugary drinks face higher rates.
What about services?
Beauty, wellness, hotel rooms under Rs. 7,500 per night, and several medical services will now attract just 5 percent GST. Most other services will remain at 18 percent.
Will my monthly grocery bill fall?
Yes, many household items like soaps, shampoos, toothpaste, biscuits, chocolates, and packaged foods now attract only 5 percent tax instead of 12 or 18 percent. Breads and paneer are tax-free. However, overall savings depend on how retailers pass on the benefit.
What about my electricity bill?
Coal and lignite, key inputs for power, are now taxed at 18 percent instead of 5 percent. Over time, this could put upward pressure on electricity costs.
Are medicines and health services cheaper?
Yes. Lifesaving drugs are tax-free, other medicines now fall under 5 percent, and health and life insurance premiums are exempt from GST. This should ease medical expenses.
Will buying a car cost less?
Small cars and motorcycles up to 350cc are cheaper, shifting from 28 percent to 18 percent. But luxury cars and bigger models face a steep 40 percent levy, making them costlier.
How does this affect small businesses?
The simplification into two slabs makes compliance easier and reduces disputes. Refunds for inverted duty structures are being streamlined. However, some businesses may lose flexibility in classification.
Why is there a 40 percent rate?
It is designed as a deterrent for goods the government views as harmful (tobacco, sugary drinks) or indulgent (yachts, luxury cars).
Will prices fall immediately?
Not always. While taxes have been cut, whether companies pass on the benefit depends on market competition and enforcement. Consumers may need to watch closely.
