GST: Simplified rates, more relief

The Goods and Services Tax (GST), rolled out on 1 July 2017, has been India’s most ambitious indirect tax reform. By subsuming a wide array of central and state levies into a single system, GST created a common market, reduced cascading of taxes, and improved transparency. Over the last eight years, the GST regime, refined through rate rationalisation and digitalisation, has become the backbone of India’s indirect tax framework.

At its 56th meeting, the GST Council, chaired by Union Finance Minister Nirmala Sitharaman, approved a new set of reforms. These “Next-Gen GST Reforms” focus on lowering the burden on households, making compliance easier for businesses, and strengthening economic growth. The measures reflect a consensus among states and the Centre and follow Prime Minister Narendra Modi’s Independence Day pledge to deliver a “Diwali gift” to citizens through lower taxes on essentials.

The reforms replace the earlier four-slab system of 5, 12, 18, and 28 per cent with a streamlined two-rate structure of 5 and 18 per cent. A special 40 per cent slab is retained for luxury and “sin goods” such as tobacco, pan masala, high-end cars, and private yachts.

Simplification reduces confusion, curtails classification disputes, and makes compliance more straightforward for businesses, especially micro, small and medium enterprises (MSMEs). Quicker refunds and lower compliance costs are expected to ease working capital pressures, while digital filing and automated assessments will continue to reduce face-to-face interactions and potential disputes.

Consumers stand to benefit directly from tax cuts on everyday essentials. Household goods such as soaps, shampoos, toothpaste, toothbrushes, tableware, bicycles, and umbrellas will now attract only 5 per cent GST. Popular packaged foods—namkeens, sauces, pasta, chocolates, coffee, and preserved meats — have shifted from 12 or 18 per cent to 5 per cent.

Dairy and bakery staples including UHT milk, paneer, and all forms of Indian breads have been moved to the nil rate. The cost of home appliances such as TVs above 32 inches, air conditioners, and dishwashers falls from 28 to 18 per cent. Together, these reductions lower household spending, expand demand, and encourage manufacturing.

Cement, a critical input for housing and infrastructure, will now attract 18 per cent GST instead of 28 per cent. Bricks, marble blocks, granite, and bamboo flooring have shifted to the 5 per cent slab. Lower costs are expected to stimulate demand for affordable housing and reduce project costs across the construction industry.

Real estate accounts for significant employment, especially for informal labour. Analysts note that reducing the input costs in construction can accelerate delivery in housing, help more people own homes, and create multiplier effects across steel, cement, and allied industries.

Vehicles and parts also benefit from a rationalised structure. Small cars, two-wheelers up to 350cc, three-wheelers, buses, and trucks move from 28 to 18 per cent. Auto parts also fall under the lower rate, reducing repair and maintenance costs.

The automobile industry, a major employer and contributor to manufacturing GDP, has been facing subdued demand in recent years. Lower GST is expected to revive sales in the industries and increase support for ancillary industries, and strengthen India’s export competitiveness. A clearer classification is also expected to help reduce disputes between manufacturers and tax authorities.

Farmers will see reduced costs for machinery and inputs. Tractors, harvesters, threshers, drip irrigation systems, sprinklers, poultry equipment, and bee-keeping machines now attract 5 per cent GST, down from 12 per cent. Bio-pesticides and natural menthol also shift to 5 per cent.

Correcting the inverted duty structure on fertiliser inputs improves viability of domestic production and reduces import dependence. Lower input costs support sustainable farming, enhance yields, and increase rural incomes.

In the service sector, GST on hotels stays, up to `7,500 per night, has fallen from 12 to 5 per cent. Gyms, salons, barber services, and yoga classes have come down from 18 to 5 per cent. The lower costs improve access to wellness and hospitality services, while encouraging consumption and supporting job creation.

Educational materials also enjoy significant relief now. Exercise books, pencils, crayons, erasers, and sharpeners move to nil GST, while geometry boxes and related school supplies have reduced to 5 per cent. By cutting the costs on learning essentials, the reforms directly assist families and students.

The reforms also address long-standing concerns in textiles by reducing GST on man-made fibre and yarn to 5 per cent, correcting inverted duty structures. The lower rates on handicrafts, paintings, and artisan products— that are down from 12 to 5 per cent — support rural livelihoods, preserve heritage, and make Indian products more competitive. Toys, including wooden and textile dolls, also shift to 5 per cent, boosting domestic toy manufacturing.

Healthcare sees wide-ranging relief. Thirty-three life-saving drugs and diagnostic kits have moved to nil GST, while other medicines, including traditional systems such as Ayurveda and Unani, are reduced to 5 per cent. Medical oxygen, thermometers, surgical instruments, spectacles, and corrective lenses are standardised at 5 per cent.

A landmark reform is the GST exemption on life and health insurance premiums. Individual policies, family floaters, and senior citizen coverage will now be tax-free. By reducing costs, the exemption expands coverage, aligning with the government’s vision of “Insurance for All” by 2047.

Industry associations and trade representatives have welcomed the reforms. Handicraft exporters noted that reduced rates could stabilise employment for artisans disrupted by global tariffs. Healthcare manufacturers said the exemption on insurance and medical products would drive local consumption and improve affordability. Business chambers highlighted that lowering GST on everyday consumption would provide relief to citizens while creating a demand-driven boost for the economy.

The reforms are designed not only to lower prices but to create a virtuous cycle. Cheaper goods expand demand, stimulating production and creating jobs. Simplified slabs reduce disputes and encourage voluntary compliance, widening the tax base. Corrected duty structures promote domestic value addition and exports.

The GST taxpayer base has already expanded from 66.5 lakh in 2017 to 1.51 crore in 2025. Gross collections doubled over the past four years, reaching `22.08 lakh crore in FY 2024–25. Average monthly revenues now exceed `2 lakh crore, reflecting stronger compliance and robust consumption. Lower rates, coupled with higher compliance, are expected to sustain revenue growth.

Before GST, India’s indirect tax system was fragmented, with varying state levies, multiple returns, and cascading of taxes. GST replaced 17 taxes and 13 cesses, creating a unified national market. Since 2017, reforms such as e-way bills, e-invoicing, and faceless assessments have improved transparency and reduced tax evasion.

The latest rationalisation continues this trajectory.