GST 2.0: ‘Dharmo Rakshati Rakshitaha’, finally

The biggest indirect tax reform in India since Independence was the Goods and Services Tax (GST), which came into effect on July 1, 2017. The Goods and Services Tax unified several central and state taxes into a single system, thereby mitigating the cascading effect of taxes, simplifying adherence, promoting transparency and establishing a unified national market.

GST has become the cornerstone of India’s indirect tax system after eight years of development, aided by rate rationalization and digitalization.

In September 2025, India’s Goods and Services Tax (GST) had a historic change, the biggest revision since its introduction in 2017.

The 56th GST Council meeting approved the GST 2.0 reform, which included a special 40 percent rate for luxury and sin items in addition to a streamlined two-slab structure of 5 percent and 18 percent.

The goals of this recalibration are to accelerate consumption-led growth, simplify compliance, and lessen tax costs. This article analyses the sector-wise changes in GST rates, evaluates their potential to promote economic growth, milestones, challenges, and ends with a conclusion.

New rates and reforms in GST 2.0

The Ministry of Finance (MoF) simplified and stated that the New GST rates will be implemented with effect from 22 September 2025. The new GST framework replaces the earlier four-tiered structure (5, 12, 18, and 28 percent) with:

• Nil Rate (0): On life-saving medicines, basic food items like bread and paneer, health and life insurance.
• 5% (Merit Rate): On essentials such as personal care products, agricultural inputs, school supplies, and handicrafts.
• 18% (Standard Rate): On most goods and services, including electronics, cement, small vehicles, and appliances.
• 40% (Demerit/Sin Rate): Luxury items and sin goods like tobacco, pan masala, sugary drinks, and high-displacement vehicles.

The goals of this simplification are to improve business ease, lower compliance costs, and increase GST transparency.

The Prime Minister announced in his Independence Day address thus: “The government will bring Next-Generation GST reforms, which will bring down the tax burden on the common man. It will be a Diwali gift for you.” 

The MoF has accordingly brought in the present Next-Gen GST changes.

Next-Gen GST modifications improve upon the GST’s achievements by implementing a simpler, two-tiered system, fairer taxation, and the convenience of digital filing for faster refunds.

They reinforce state revenues, empower MSMEs and manufacturers with more seamless financial flows, put consumers first by reducing prices on necessities and high-value goods, and increase demand, which propels growth in manufacturing and consumption throughout India.

Sector-wise GST rate changes

Now let us see the sector-wise GST rate changes, which will be easier for our analysis, to know their impact and how they can boost economic growth.

1. Agriculture and Farm Equipment

• Old Rate: 12 percent | New Rate: 5 percent

Impact

Farmers’ input costs will drop as a result of lower taxes on agricultural machinery and irrigation supplies, which will promote productivity and mechanisation. This promotes food security and rural economic growth.

2. Consumer Durables and Electronics

• Old Rate: 28 percent | New Rate: 18 percent

Impact

Due to a lower tax rate, there should be a reduction in prices for appliances, TVs, and air conditioners, which will increase demand. As a result, there may be an increase in the manufacturing of these commodities and the creation of jobs.

3. Healthcare and Pharmaceuticals

• Old Rate: 12–18 percent| New Rate: Nil for life-saving drugs; 5 percent for diagnostic kits and disposable

Impact

Reduced prices for necessary medical supplies would increase affordability and accessibility, particularly in rural areas. As a result, the healthcare industry may see a rise in demand and investment.

4. FMCG (Fast-Moving Consumer Goods)

• Old Rate: 12–18 percent| New Rate: 5 percent for daily essentials like soaps and toothpaste

Impact

Reduced taxes on domestic goods increases affordability and stimulates spending. This helps the expansion of the retail sector and benefits FMCG companies.

5. Education and Handicrafts

• Old Rate: 12 percent| New Rate: 5 percent

Impact

Students and craftspeople gain from lower GST on school supplies and handicrafts, which promotes inclusive growth. It also encourages rural employment and cultural preservation.

6. Automobiles

• Old Rate: 28 percent | New Rate: 18 percent for small cars and motorcycles up to 350cc

Impact

More affordability for vehicles will enhance sales in the automobile sector, which is a major employment generator. It also supports ancillary businesses such as auto components and logistics.

7. Construction and Cement

• Old Rate: 28 percent | New Rate: 18 percent

Impact

A decrease in cement prices would result in lower building costs, which would help infrastructure and real estate developments. This promotes affordable housing and quickens urban growth.

8. Luxury and Sin Goods

• Old Rate: 28 percent + cess | New Rate: 40 percent

Impact:

Increased taxes on luxury vehicles and other non-essential items, such as tobacco, deter consumption and fund public services. This will help advance towards the goals of health and equity. 

Economic Growth

1. Consumption Boost:

Reduced GST rates on consumer and essential goods increases disposable income and encourages expenditure. This will stimulate demand. This demand-side stimulus is expected to drive GDP growth, especially around the festival seasons.

2. Support for MSMEs

Micro, Small, and Medium-Sized Businesses (MSMEs) are able to maintain their competitiveness through lower input costs and a simplified tax structure. Liquidity and operational efficiency are enhanced by simpler compliance and quicker reimbursements.

3. Correction of Input Taxes

The change addressed long-standing difficulties where input taxes exceeded output taxes, leading to blocked credits. This modification decreases manufacturing costs and boosts exports.

4. Moderation on Inflation

The reduction of taxes is expected to bring moderation in inflation.  Reduced taxes on essential goods will increase consumer expenditure, along with bringing economic stability by reducing consumer price inflation.

5. Fiscal Balance and Revenue Loss

Over time, higher consumption and compliance are anticipated to make up for the predicted ₹48,000 crore in revenue/income loss. In FY 2024–2025, GST collections have already surpassed ₹22 lakh crore, demonstrating sound fiscal health.

Milestone of GST Reforms

• 13 cesses and 17 distinct taxes were merged into a single unified tax.
• Eliminated the Tax Cascade (tax on tax).
• Established a unified national market with uniform prices and practices.
• Enhanced transparency and streamlined compliance.
• Symbolised economic integration of the country.

Challenges of New GST Reforms

Though the present GST reform may be largely positive, there are certain challenges that remain. They are:

• Insurance Sector: Lower rates could put pressure on the health and life insurance sectors’ profitability.
• Logistical Complexities: Training stakeholders and updating the system are necessary when switching to new rates.
• Revenue Risks: State finances may be impacted by temporary declines in revenue unless they are compensated for by increased consumption and compliance.

Conclusion

A major step toward a tax system that is more growth-oriented, efficient, and egalitarian is the GST 2.0 reform. It is anticipated that income tax relief and GST rate reductions will boost the economy by more than ₹2.5 lakh crore.

By simplifying the structure and cutting prices in key areas, the government intends to increase demand, support businesses, and encourage inclusive development.

Though there are implementation challenges, the overall outlook is optimistic and has the potential to transform India’s economic landscape and enhance its global competitiveness.