Big GST reset on the horizon with Govt’s new two-slab proposal

August 21, 2025 Finance Talk Valli Sarvani

In a bold move that could redefine how Indians pay taxes and consume goods, the Centre has circulated a blueprint for next-generation GST reforms, aimed at simplifying the existing tax structure.

The proposal revolves around collapsing the current four-tier GST regime into two primary slabs: 5% for essentials and 18% for most other goods and services, alongside a new 40% slab for sin and luxury goods.

New GST Slabs Proposed:

5%: Essentials and commonly used household goods
18%: Standard rate for the majority of goods and services
12% and 28% slabs to be eliminated
40%: New slab for sin and luxury items (limited to ~5–7 categories)

Under the proposed changes, many daily-use items currently taxed at 12% may fall to 5%, including:

Packaged food, butter, ghee
Apparel, footwear, stationery
Bicycles, eyewear, and toothpowder
Insurance premiums (life and health) may drop from 18% to 5% or be exempt
Medicines and medical equipment may fall from 12% to 5% or nil

These changes could offer meaningful relief to middle-class households and improve affordability for essential goods.

Consumers may see significant price cuts in major purchase categories:

ACs, TVs, refrigerators, cement: 28% to 18%
Two-wheelers under 350cc: 28% to 18%
Small cars under 1200cc: 29–31% (GST + cess) to 18%
Hybrid cars: 28% to 18%

To offset revenue losses, a 40% GST rate is proposed for:

Pan masala, gutkha, tobacco
Online gaming (currently 28%)
High-end luxury cars and SUVs

This move reinforces the government’s approach of making sin goods expensive while easing pressure on essentials.

Benefits:

Simplified tax structure and reduced classification disputes
Relief to MSMEs, exporters, and startups with better input set-off and faster refunds
Boost in consumption by reducing tax burden on daily-use and aspirational goods
Correction of inverted duty structures in textiles and fertilisers, benefiting farmers and producers

While the proposal is largely welcomed, some sectors have raised concerns:

Hospitality industry fears increased costs if food items move to 18%
Rental GST for restaurants remains at 18%, with no input tax credit, limiting profitability
Complexities in classification between dine-in and takeaway still exist

The Group of Ministers is scheduled to meet on August 20–21 to deliberate. Final decisions will be taken by the GST Council, possibly aligning with Prime Minister Narendra Modi’s vision of a simplified, transparent, and inclusive tax regime announced on Independence Day.

If approved, the reforms could bring a Diwali bonanza for consumers and a long-term boost to the Indian economy.

Image from Pxhere (Free for commercial use / CC0 Public Domain)

Image Published on March 08, 2017