Major Upgrade: Breaking Down GST 2.0

The 56th meeting of GST Council chaired by Union Finance Minister Mrs. Nirmala Sitaraman has now approved the next-generation GST reforms, focusing on improving the life of the common man and ensuring ease of doing business for all, including small businesses. On the Independence Day, Prime Minister Shri Narendra Modi announced, “The government will bring the GST reforms of the next generation, which will reduce the tax burden on the common man. It will be a Diwali gift for you.” He said that reforms strengthening India’s long -term development will benefit the common man, farmers, MSMEs, women and middle-class families.

The GST Council recommended a comprehensive reform package to align with the PM’s vision that includes rate rationalization with a simplified two-slab structure- 5% and 18%. These recommendations are based on consensus to make GST simple, fair and more developing among all members of the GST Council. The revised rate and exemption will come into effect from 22 September 2025, which ensures timely relief for labour-intensive Industries, farmers and agriculture, health, etc. Only exception will be specified goods namely, cigarettes, chewing tobacco products like zarda, unmanufactured tobacco and beedi, for which the existing rates of GST and compensation cess will continue to apply and the new rates will be implemented at a later date to be notified, based on discharging of entire loan and interest liabilities on account of compensation cess.

Why It Matters?

• For businesses, fewer slabs encourage simple compliance, less classification disputes and smooth invoicing.
• For consumers, it reduces confusion about different taxes levied on similar products, and ensures that taxes are not essentially imposed at high rates.
• For the government, it balances relief on essential things with high taxes on items that are harmful or luxurious, keeping the revenue stable on a large scale.

Major Changes in GST Rate Slabs

The 4-rate slab is reformed into following: –

• Merit (5 %): Essentials and indispensables.
• Standard (18 %): Most other goods and services.
• De-merit (40 %): Luxury/sin items.

What’s Becoming Cheaper? (5 % Rate)

The following items have shifted to 5% slab rate: –

• Reduction of GST from 12% to 5% on various medical equipment and supplies devices such as wadding gauze, bandages, diagnostic kits and reagents, blood glucose monitoring system (Glucometer) medical devices, etc
• Reduction of GST on all other drugs and medicines from 12% to 5%.
• Reduction of GST from 18% to 5% on various medical apparatus and devices used for medical, surgical, dental or veterinary usage or for physical or chemical analysis
• Correction of long-pending inverted duty structure for the manmade textile sector by reducing GST rate on manmade fibre from 18% to 5% and manmade yarn from 12% to 5%
• Correction of inverted duty structure in fertilizer sector by reducing GST from 18% to 5% on Sulphuric acid, Nitric acid and Ammonia
• Reduction of GST from 12% to 5% on renewable energy devices and parts for their manufacture
• Reduction of GST from 12% to 5% on “Hotel Accommodation” services having value less than or equal to Rs. 7,500 per unit per day or equivalent
• Reduction of GST from 12% to 5% on agricultural goods, such as tractors, agricultural, horticultural or forestry machinery for soil preparation or cultivation, harvesting or threshing machinery, including straw or fodder balers, grass or hay mowers, composting machines etc
• Reduction of GST from 12% to 5% on labour intensive goods such as Handicrafts, Marble and travertine blocks, granite blocks, and Intermediate leather goods
• Reduction of GST from 18%/12% to 5% on a host of common man items such as, hair oil, toilet soap bars, shampoos, toothbrushes, toothpaste, Bicycles, Tableware, kitchenware, other household articles, etc.

What’s Moving to Standard Slab? (18 % Rate)

• Reduction of GST from 28% to 18% on Cement
• Reduction of GST from 28% to 18% on Small Cars and Motorcycles equal to or below 350cc
• Reduction of GST from 28% to 18% on buses, trucks, ambulances etc
• Uniform rate of 18% on all auto parts irrespective of their HS code; Three-Wheelers from 28% to 18%
• GST on coal, lignite, and peat will increase significantly from 5% to 18%
• Rate of several categories of uncoated and coated paper and paperboard will increase from 12% to 18%
• Multiple transport services, including passenger air transport (non-economy), goods transport by GTA, and renting of motor vehicles to attract 18% tax (with ITC)
• Works contracts for government projects involving earthwork and services related to oil and gas exploration will be taxed at 18%, up from 12%

Items Priced Higher: 40 % “Sin & Luxury” Slab

For discouraging non-essential consumption, the following items would be covered under 40% slab rate: –

• Specified aerated waters, caffeinated or carbonated beverages
• Specified tobacco and related products (effective from a notified date)
• Motorcycles of engine capacity exceeding 350cc
• Hybrid vehicles with engine capacity exceeding 1200cc (petrol) / 1500cc (diesel), or length more than 4000mm, or both
• Mid Segment with Internal combustible engine capacity not exceeding 1500cc and Length exceeding 4000mm
• Large Segment with Internal combustible engine capacity exceeding 1500cc and Length exceeding 4000mm
• SUV Segment with engine capacity exceeding 1500cc; Length exceeding 4000 mm and Ground Clearance of 170 mm and above

Additional Measures & Industry Impacts

Through the proposed next generation GST reforms, the Government hopes that these changes will encourage consumption, where lower rates produce high compliance and a comprehensive tax base participation.

• Manufacturing and export: The improvement of inverted duty structures will unlock working capital and make Indian products competitive.
• MSME Empowerment: Simple compliance procedures and low rates will be encouraged for the unorganized sector, expanding the tax base at low rates.
• Consumer relief: Cheaper goods will promote purchasing power, while low prices on white goods will stimulate demand in the sustainable field.

Conclusion: GST 2.0

From September 22, 2025, the new GST 2.0-rate rationalization is a significant turn in India’s tax regime. By simplifying the system in 5%, 18% and 40% slabs, the government has addressed one of the greatest criticisms of the original GST-complexity.
For consumers, this means that everyday goods and services will become lighter on the wallet, while luxury and harmful products will be levied heavy taxes. For businesses, it means a chance to focus more on development than less controversy, smooth compliance, and paperwork. For the economy, it promises a demand revival, soft inflation, and long-term belief in India’s Indirect tax system.

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FAQs

1. What is GST 2.0 and when will it start?
   GST 2.0 is the new simplified tax system with 3 slabs—5%, 18%, and 40%. It starts from 22nd September 2025.
2. How will GST 2.0 help consumers?
   It lowers taxes on daily-use items, making essentials like medicines, toiletries, and household goods more affordable.
3. What’s the benefit for small businesses?
   Simpler rates mean easy compliance, fewer disputes, and lower taxes on key inputs for MSMEs.
4. Which sectors gain the most?
   Healthcare, agriculture, textiles, and renewable energy benefit from reduced GST and corrected duty structures.
5. What falls under the 40% GST slab?
   Tobacco, luxury vehicles, SUVs, and aerated drinks will be taxed at the highest 40% rate.
6. Will GST apply to fuel and alcohol now?
   No, fuel and alcohol are still taxed by states and not included in GST 2.0.