GST Council Slashes Rates to Two Slabs, Introduces 40% Tax for Luxury Goods
New Delhi, September 4, 2025 — In a landmark overhaul of India’s Goods and Services Tax (GST) regime, the GST Council, chaired by Union Finance Minister Nirmala Sitharaman, approved a simplified two-tier tax structure of 5% and 18%, while abolishing the existing 12% and 28% slabs. A new 40% tax slab was introduced for luxury and sin goods, marking a significant shift aimed at reducing the tax burden on essentials and boosting economic growth. The changes, effective from September 22, 2025, the first day of Navratri, were hailed by Prime Minister Narendra Modi as a “Diwali gift” for the common man, with widespread implications for consumers, businesses, and the broader economy.
A Simplified Tax Structure
The 56th GST Council meeting, held on September 3–4, 2025, in New Delhi, finalized the much-anticipated “GST 2.0” reforms, first announced by PM Modi during his Independence Day speech on August 15, 2025. The new structure eliminates the 12% and 28% tax slabs, redistributing goods and services into two primary rates: 5% for essentials and daily-use items, and 18% for most other goods and services. A special 40% slab targets luxury and demerit goods, while a concessional rate below 1% applies to select items like precious metals (gold and silver at 3%) and semi-precious stones (0.25%).
According to Finance Minister Sitharaman, the reforms prioritize “ease of living” for the common man. “Every tax on daily-use items has undergone a rigorous review, and in most cases, rates have come down drastically,” she said during a press conference following the meeting. “Labour-intensive industries, farmers, the agriculture sector, and the health sector will benefit, while key drivers of the economy will be given prominence.”
The decision follows recommendations from the Group of Ministers (GoM) on Rate Rationalisation and the Fitment Committee, which have been studying ways to streamline the GST framework since 2024. The reforms aim to simplify compliance, boost consumption, and address inverted duty structures that have hindered manufacturing competitiveness.
What Gets Cheaper?
The restructuring significantly reduces taxes on a wide range of everyday items, with 99% of goods previously taxed at 12% moving to the 5% slab and 90% of those in the 28% slab shifting to 18%. Notable changes include:
- Zero-Rated Items (0% GST): Ultra-high temperature (UHT) milk, paneer, chenna, khakra, plain chapati, roti, and all Indian breads have been reduced from 5% to nil. Additionally, 33 life-saving drugs, including cancer medications, and all individual life and health insurance policies are now exempt from GST, down from 12% or 18%.
- 5% Slab: Items like hair oil, toilet soaps, shampoo, toothbrushes, toothpaste, bicycles, furniture, namkeen, pasta, noodles, coffee, corn flakes, butter, ghee, dry nuts, condensed milk, sausages, fruit pulp, juice, milk-based beverages, ice cream, pastries, biscuits, bio-pesticides, handicrafts, marble, granite blocks, spectacles, and renewable energy devices (e.g., windmills, solar heaters, PV cells) have been reduced from 12% or 18%. Fertilizer inputs like sulfuric acid and ammonia, as well as man-made fiber in the textile sector, also now attract 5% GST.
- 18% Slab: Most consumer durables, including televisions, air conditioners, refrigerators, washing machines, dishwashers, small cars (up to 1.2L engines), two-wheelers (under 350cc), and motor vehicles designed for transporting 10 or more persons (e.g., buses, ambulances) or goods (e.g., lorries, trucks) have been reduced from 28% to 18%.
These changes are expected to lower prices for 175 broad items of mass consumption, including snacks, bread, and household goods, making them more affordable for the middle class and rural consumers. For instance, the shift of namkeen and corn flakes from 18% to 5% is projected to revive demand in the fast-moving consumer goods (FMCG) sector.
The 40% Slab: Targeting Luxury and Sin Goods
The new 40% tax slab targets a select group of luxury and demerit goods, including paan masala, tobacco products (cigarettes, bidis, chewing tobacco, zarda), aerated waters, carbonated and caffeinated beverages, high-end cars and SUVs, motorcycles exceeding 350cc, yachts, helicopters, and aircraft for personal use. Online gaming has also been reclassified as a demerit good, attracting the 40% rate. Notably, GST on these items will now be levied on the retail sale price (RSP) rather than the wholesale value, aiming to curb tax evasion.
However, tobacco-related products like cigarettes and bidis will continue to attract the existing 28% GST plus compensation cess until outstanding loans tied to the cess are repaid, with the transition to the 40% slab to be determined later. Alcohol remains outside the GST ambit, taxed separately by states through excise duties.
The 40% slab is expected to apply to only 5–7 items, designed to deter consumption of harmful goods while generating revenue to offset losses from lower rates on essentials. Estimates suggest the high tax on sin and luxury goods will yield approximately ₹45,000 crore, though the overall revenue loss from the rate cuts is projected at ₹93,000 crore.
Economic and Industry Impacts
The GST overhaul is poised to have far-reaching effects on India’s economy. By reducing taxes on essentials, the government aims to boost consumption, particularly in rural and middle-class markets. “The thinking is that lower rates will increase consumption, reduce evasion, and widen the tax net, which will increase revenues by the end of the financial year,” an official source told The Hindu.
Sectors such as agriculture, textiles, fertilizers, renewable energy, automotive, handicrafts, and health are expected to benefit significantly. For instance, farmers will see relief from lower GST on equipment and chemicals, while the textile industry benefits from a corrected inverted duty structure with man-made fiber taxed at 5%. The automotive sector anticipates price reductions for small cars and two-wheelers under 350cc, though luxury vehicles will face higher costs under the 40% slab.
However, some industries expressed concerns. Hospitality stakeholders, like celebrity chef Harpal Singh Sokhi, urged further reductions, noting that restaurant goods taxed at 5% jump to 18% when packaged, creating confusion. Cloth merchants and steel traders, who previously protested high GST rates, welcomed the changes but called for clearer compliance guidelines.
Political and Public Reactions
PM Modi praised the reforms, tweeting, “GST tweaks will benefit middle-class, farmers, and youth,” aligning with his Independence Day promise of a “next-generation” GST framework. The decision was cleared unanimously without voting, though some states, including Punjab, sought clarity on revenue protection mechanisms to offset the estimated ₹93,000 crore loss.
On X, sentiments were mixed. While some users hailed the reforms as consumer-friendly, others, like @learning_pt, criticized the 40% slab on luxury goods, arguing it could stifle innovation and R&D in high-end products. Posts from @FinMinIndia and @PMOIndia emphasized the citizen-centric nature of the reforms, framing them as a step toward Atmanirbhar Bharat.
Implementation and Challenges
The new rates take effect from September 22, 2025, except for tobacco-related products, which await further notification. The end of the compensation cess regime, set for March 31, 2026, has created fiscal space for these reforms, but states like Himachal Pradesh and Punjab raised concerns about revenue sustainability.
The GST Council also approved measures to ease compliance, including pre-filled GST returns, faster refunds, and technology-driven registration for MSMEs, aiming to reduce administrative burdens. However, the transition to a two-slab system may pose challenges for businesses adjusting to new tax classifications and pricing structures.
Looking Ahead
Dubbed “GST 2.0,” these reforms mark one of the most significant tax restructuring efforts since GST’s introduction in 2017. By simplifying the tax framework, reducing rates on essentials, and targeting luxury goods, the government aims to make goods more affordable, enhance industry competitiveness, and promote inclusive growth. As businesses and consumers prepare for the September 22
For More News Updates Follow Us On Www.tconews.in
