Diwali Comes Early: Sitharaman Unveils Game-Changing GST 2.0, Slashes Rates On Essentials For Middle Class

In a major pre-festive bonanza, taxes on a wide array of goods from household staples and life-saving medicines to small cars and consumer appliances will be significantly reduced starting September 22.

The GST Council approved the most comprehensive overhaul of India’s consumption tax system since its introduction in 2017. This landmark reform will impact everything from toothpaste and insurance premiums to tractors, cement, and shampoos, marking a new era of “next-generation GST.”

The decision was taken on Wednesday during a marathon 10-hour session of the 56th GST Council meeting, chaired by Union Finance Minister Nirmala Sitharaman, coming just weeks after Prime Minister Narendra Modi highlighted a major reform agenda in his Independence Day speech.

“We’ve reduced the slabs. There shall be only two slabs, and we are also addressing the issues of compensation cess,” Sitharaman announced, unveiling a citizen-friendly two-tier goods and services tax system — a standard rate of 18% and a merit rate of 5%, alongside a special 40% demerit rate for select goods such as pan masala, tobacco, and aerated drinks.

“These reforms have been carried out with a focus on the common man. Every tax on the common man’s daily use items has gone through a rigorous review and in most cases, the rates have come down drastically,” she added.

A Structural Reset Beyond Simple Rate Cuts

Finance Minister Sitharaman described the reforms as a structural reset rather than mere rate rationalisation. The package aims to ease compliance, correct long-standing anomalies like the inverted duty structure, and support key sectors.

“Labour-intensive industries have been given good support. Farmers and the agriculture sector, as well as the health sector, will benefit. Key drivers of the economy will be given prominence,” she said.

Insurance Becomes GST-Free; Essentials Made More Affordable

A major win for the middle class is the full GST exemption on individual life and health insurance policies—including ULIPs, term life, and family floater plans. This move is expected to ease household expenses and boost insurance penetration nationwide.

Household essentials also see major relief: toothpaste, soaps, shampoos, hair oil, bicycles, kitchenware, and tableware will be taxed at just 5%, while UHT milk, Indian breads, chena, and paneer will attract zero GST.

Rate Cuts Across Key Sectors: Autos, Cement, Healthcare, and More

In the automobile sector, GST on small cars and motorcycles under 350cc has been cut from 28% to 18%. Three-wheelers and auto parts will now be uniformly taxed at 18%, while buses, ambulances, and trucks will also benefit from lower rates. While Electric vehicles (EVs) will continue to enjoy the existing concessional GST rate of 5%, with no changes announced.

Cement, a critical driver of infrastructure and housing, sees its GST rate reduced from 28% to 18%, fulfilling a long-standing demand from the real estate and construction industries.

The healthcare sector benefits from zero GST on 33 essential medicines, alongside reduced rates of 5% on a wide range of medical equipment, diagnostic kits, and surgical devices.

Revenue Impact and Shared Responsibility

Although the sweeping tax cuts are expected to lead to an estimated revenue loss of around Rs 47,700 crore, Finance Minister Sitharaman emphasised that the fiscal impact will be shared equally by the Centre and the States.

“Anything gained or lost is for everybody. Centre, states to lose or gain together. Nobody is a donor, nobody is a donee within the GST Council,” she explained.

Special 40% GST Slab for Sin and Premium Goods

The highest GST slab of 40% will be applied to sin goods and premium items, such as luxury vehicles including yacht and helicopter.

Sitharaman clarified that the 40% rate will specifically apply to pan masala, cigarettes, gutka, chewing tobacco products like zarda, unmanufactured tobacco, and bidis.

Additionally, aerated drinks containing added sugar or sweeteners, flavoured or caffeinated beverages, carbonated fruit drinks, and similar non-alcoholic beverages (except those taxed at lower rates) will also fall under this 40% slab.

All revised GST rates will take effect from September 22, 2025, except for tobacco-related products, which will maintain current rates and cess until compensation-related loans are fully repaid.

On impact on GDP, FM said it will depend on how people perceive rate reduction. "I think it will have a very positive impact on GDP,” Sitharaman expressed confidently, forecasting an economic boost from these reforms.

Addressing speculation about global trade tensions influencing the timing, Sitharaman stressed that the reforms have been in the works for over a year and a half, underscoring the government’s commitment to structural tax reform.