MUMBAI – India’s Finance Minister Nirmala Sitharaman presented major changes to India’s Goods and Services Tax (GST) after the 56th GST Council meeting in New Delhi. The council, which brings together finance ministers from the Centre and states, agreed to a two-tier GST structure with rates of 5 percent and 18 percent, replacing the four existing slabs (5, 12, 18, and 28 percent).
A separate 40 percent slab will now apply to luxury and sin items, which include high-end vehicles, tobacco, and cigarettes. The new tax rates are scheduled to come into effect from September 22, 2025, aligning with the start of Navratri. These adjustments mark one of the most significant revisions in India’s tax policy in recent years, set to impact consumers, businesses, and the wider economy.
A Streamlined Tax System for Everyday People
The GST Council’s update is designed to answer long-running calls to simplify taxes and lower compliance for regular consumers. During her press briefing after a lengthy meeting that lasted over ten hours, Sitharaman said the changes would help ordinary people, farmers, the middle class, and small business owners.
She explained to the India Times that cutting tax rates is only one part of the solution, with broader reforms intended to make daily life and business operations easier. “This is a big step towards a simpler and fairer tax system,” she explained. The council’s united approval highlights strong cooperation among the states and the central government.
Many common household products and essential goods now fall under the 5 percent tax bracket, which reduces costs for millions. The 12 percent and 18 percent taxes were removed from items like hair oil, soaps, shampoos, toothbrushes, bicycles, snacks, pasta, instant noodles, coffee, breakfast cereals, butter, and ghee, placing them in the lowest slab.
UHT milk, paneer, and all types of Indian breads will not be taxed under GST at all, making these basics more affordable. GST on life and health insurance policies, previously at 18 percent, has been scrapped as well, giving a break to middle-class and older policyholders.
Impact on Business: Relief for MSMEs and Improved Compliance
This simplified GST is expected to help micro, small, and medium enterprises (MSMEs) by lifting a major compliance burden. The system now has fewer tax brackets, which means owners no longer have to deal with the confusion of four different rates.
Sitharaman pointed out that these changes are intended to create better conditions for MSMEs and startups, which are essential to India’s economy. She shared that the “next wave of GST reforms will make it easier for small businesses to focus on growth.”
Duty inversion, where inputs are taxed at higher rates than finished goods, created headaches for manufacturers. This overhauled structure addresses that problem. With items redistributed across lower slabs, supply chains may become more efficient, and production expenses should drop.
Renewable energy devices, including windmills, bioenergy facilities, photovoltaic cells, and solar heaters, now face a 5 percent tax instead of 12 or 18 percent, making investment in clean energy more attractive. Other industries, like handicrafts, bio-pesticides, and portions of the pharmaceuticals sector, will also benefit from reduced taxes.
Businesses that produce luxury and sin products face a separate 40 percent tax bracket. This is an increase from the old 28 percent rate plus compensation cess. Sitharaman clarified that the compensation cess would remain in place for such items until the loans taken to support states’ revenue are fully paid. Heavily taxing demerit goods will help maintain government revenue and curb the consumption of products considered harmful.
Economic Outlook After the New GST Rates
Shifting the New GST rates is expected to cost the Centre and the states about Rs 47,700 crore each year. Revenue Secretary Arvind Shrivastava said the move should remain financially stable, thanks to improved tax collection and compliance. Sitharaman explained that lowering rates usually boosts sales, which can offset some losses. Data since 2017 shows a steady drop in the overall revenue-neutral rate as GST has led to higher consumption.
The timing of these tax cuts, with rising US tariffs on Indian exports, is seen as a way to strengthen domestic demand just as exporters face new pressures. With taxes lower on daily essentials, many hope to see a boost in consumer spending, which can support growth if exports dip. Social media posts from the public reflect support for the changes, especially with tax relief for essentials, health insurance, and small cars.
The removal of GST from health and life insurance is likely to be far-reaching. Government data shows that Rs 16,398 crore was collected from these industries in 2023-24. Without GST, insurance should be more affordable for many families, possibly increasing the number of citizens who invest in coverage. This step was met with approval from parties like Congress and TMC, though they also voiced concerns about the time it took to deliver these updates.
Wider Political and Social Impact
The government introduced these reforms soon after Prime Minister Narendra Modi promised a new wave of tax changes in his Independence Day speech, with a roll-out ahead of Diwali. Launching the new rates during Navratri aims to create a positive link with the festive season.
Leaders from many political groups praised the update. External Affairs Minister S. Jaishankar and Railways Minister Ashwini Vaishnaw both called it progress towards a self-reliant India.
Not all the reception has been positive. Some opposition figures, like former Finance Minister P. Chidambaram, criticized the long wait to simplify GST, arguing that the four-slab system added complexity and hit consumers for years. State ministers, including Kerala’s K. N. Balagopal, raised questions about which foods fall under the new slabs, reflecting local differences.
As the rollout of the new GST rates approaches, attention will turn to practical challenges for both businesses and consumers. The central government’s ongoing cooperation with the states has played a key role in shaping these changes, building a tax system that balances revenue needs with relief for citizens. Sitharaman’s actions show a push for a more open, simpler tax code in step with India’s long-term economic goals, including the vision of becoming a developed nation by 2047.
For consumers, these tax cuts should bring quick relief, especially for families and people in rural areas. For businesses, a more logical tax system means less paperwork and a greater focus on growing the company. Amid international uncertainty, the new GST rates set the stage for stronger domestic spending and a more competitive economy, helping India keep its momentum as the world’s fastest-growing major nation.
