GST 2.0 Reforms: New Two-Slab Structure and Key Rate Cuts Explained

GST 2.0 Latest News

• In its 56th meeting, the GST Council approved next-generation reforms, moving towards a simplified two-slab structure of 5% and 18%. 
• A higher 40% demerit rate will apply only to super luxury, sin, and demerit goods, streamlining India’s eight-year-old indirect tax regime.

Aim of GST Reforms

• The Goods and Services Tax (GST) Council, during its 56th meeting, decided to revamp the tax structure into a primarily two-rate system.
• The GST reforms seek to reduce the tax burden on common people, cut slabs, ease working capital issues, and improve business efficiency through automated refunds and registrations.
• All rate changes, except for tobacco-related products, will take effect from September 22 (Navratri’s first day).
• Despite state concerns over revenue loss, the meeting concluded in a single day under Finance Minister Nirmala Sitharaman, with participation from ministers of 31 states and UTs.

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Key Highlights of GST Reforms 

• PM Modi welcomed the GST Council’s decision to approve sweeping rate cuts and structural reforms, calling it a pro-people move benefiting farmers, MSMEs, middle-class families, women, and youth.

Focus on Common-Use Goods and Services

• The reforms bring major relief on daily-use items:
  • Packaged food (juices, butter, cheese, coconut water, pasta, nuts) reduced to 5%.
  • Medical items like oxygen, gauze, bandages, diagnostic kits lowered from 12% to 5%.
  • Ultra-high temperature milk, paneer, pizza bread, chapati, khakra, and erasers made GST-free.
  • Household goods (hair oil, soaps, shampoos, bicycles, kitchenware) brought down to 5%.

Tax Cuts on White Goods and Automobiles

• GST on ACs, TVs, dishwashers cut from 28% to 18%.
• Small cars (petrol up to 1200 cc/diesel up to 1500 cc) now taxed at 18%.
• Motorcycles under 350 cc and all auto parts also shifted to 18%.
• Luxury cars taxed at 40%; electric vehicles remain at 5%.

Insurance and Services

• Life and health insurance (including term, ULIP, endowment, and family floater policies) made GST-exempt.
• Gyms, salons, barbers, yoga services reduced from 18% to 5%.

Rationalisation of GST Slabs

• The Council replaced multiple slabs (5%, 12%, 18%, 28%) with a two-slab system (5% and 18%), plus a 40% demerit rate for sin goods (tobacco, pan masala, luxury cars).
• This corrects the inverted duty structure, simplifies compliance, and reduces disputes.

Financial Impact and States’ Concerns

• Some states flagged potential revenue losses of ₹80,000–1.5 lakh crore, but consensus prevailed.
• The Centre estimates the reforms will have a net fiscal implication of ₹48,000 crore on 2023–24 consumption data.

Sector-Specific Reforms

• Textiles: GST on manmade fibre cut from 18% to 5%, yarn from 12% to 5%.
• Fertilisers: Inputs like sulphuric acid, nitric acid, ammonia reduced from 18% to 5%.

Industry Response

• Industry bodies like CII hailed the reforms as pathbreaking, promising to pass benefits to consumers, reduce litigation, and enhance compliance. 
• The reforms are expected to lift demand, ease compliance, and support job creation.

GST Reforms 2025: Key Rate Cuts Impact

• GST Rate Cuts for Common Man
  • The latest GST reforms bring major relief to households and middle-class consumers. 
  • Everyday essentials such as hair oil, soaps, shampoos, toothpaste, toothbrushes, bicycles, kitchenware, and tableware have all been shifted to the 5% tax slab from 12–18% earlier. 
  • Popular food items like namkeens, sauces, pasta, instant noodles, chocolates, coffee, and butter have also seen their tax rate reduced to 5%. 
  • Significantly, cement, a key infrastructure input, has been reduced from 28% to 18%, lowering construction costs.
• Zero-Tax Relief for Essentials and Healthcare
  • Products such as ultra-high temperature milk, paneer, rotis, chapatis, and parathas will now attract 0% GST, making everyday food items cheaper. 
  • In healthcare, 33 lifesaving medicines have been exempted from GST, while spectacles for vision correction will now attract just 5% instead of 28%. 
  • Insurance services also see a major shift, with life and health insurance policies moved to 0% from 18%, providing direct benefits to households.
• White Goods and Automobiles
  • High-ticket consumer items such as air-conditioners, TVs, dishwashers, small cars, motorcycles (≤350cc), buses, trucks, and ambulances will now attract 18% GST instead of 28%.
  • This will ease affordability for consumers and boosting demand in the automotive sector. 
• Correcting Inverted Duty Structures
  • The government has addressed long-pending anomalies in textiles and fertilisers. 
  • GST on manmade fibre has been reduced from 18% to 5%, and on manmade yarn from 12% to 5%, correcting distortions in the textile value chain. 
  • Similarly, fertiliser inputs like sulphuric acid, nitric acid, and ammonia have been cut from 18% to 5%, lowering costs for agriculture and farmers.
• Special 40% Slab for Sin and Luxury Goods
  • A 40% GST rate will apply only to super-luxury and sin goods such as pan masala, cigarettes, gutka, zarda, unmanufactured tobacco, caffeinated beverages, private-use helicopters, airplanes, yachts, and large cars/motorcycles (>350cc). 
  • For now, pan masala and tobacco products will remain taxed at 28% plus cess, but they will move into the 40% slab once the Centre repays compensation loans borrowed for states.

Source: IE | TH | HT