FM unveils mega GST overhaul; PM Modi calls it a big win for farmers, MSMEs, middle class — Here’s what changes

Union Finance Minister Nirmala Sitharaman today announced a major reductions in GST rates, saying that GST 2.0 is not just about rationalising rates, it's also about structural reforms, and ease of living. Announcing mega GST 2.0 reforms, the FM informed the GST Council has unanimously approved dual GST slabs of 5% and 18%, which will come into force on September 22. She said the government is addressing the issues of compensation cess as well.

"There will be only two slabs, 5% and 18%...the Prime Minister set the tone for the next generation reforms on 15th August when he spoke from the Red Fort. He decided to give the benefit at the earliest, by Diwali...we have ensured there will be stability and predictability about the GST Reforms...I want to thank every member of the GST Council and every Finance Minister who attended the GST Council, today," the FM said during a late evening presser following deliberations by the GST Council.

The government's GST reforms are majorly targeted at key sectors like FMCG, auto, cement, and insurance, potentially boosting demand and growth. Stressing that the key drivers of the economy have been given prominence in the GST 2.0 regime, the FM said the labour-intensive industries have been given good support, health-related items will also benefit, and that farmers and agriculture as a whole will also benefit.

Following the FM’s speech, Prime Minister Narendra Modi appreciated that the GST Council, comprising the Union and the States, has collectively agreed to the proposals submitted by the Union Government on GST rate cuts and reforms, which will benefit the common man, farmers, MSMEs, the middle class, women, and youth. "The wide-ranging reforms will improve the lives of our citizens and ensure ease of doing business for all, especially small traders and businesses," said the Prime Minister.

The Finance Minister also said that every tax levied on the common man's daily use items has gone through a "rigorous review", and in most cases, the rates have come down "drastically".

Elaborating on the GST reforms, the FM said for the common man and middle class, there has been a complete reduction from 18% or 12% to 5% on certain items. “Common man items such as hair oil, toilet soap, bars, soap bars, shampoos, toothbrushes, toothpaste, bicycles, tableware, kitchenware and other household articles have all come to 5%. Whether they were in 18% or whether they were 12%,” informed the FM.

Special tax slab of 40% on 'sin and super-luxury goods'

Since most of the goods are between 18% and 5%, there is one special rate, which is only for sin and super luxury goods.

The Finance Minister said a special tax rate of 40% has been introduced, while most goods remain in the 5% to 18% range. This higher rate will apply to "sin and super-luxury goods". Sin items include paan masala, cigarettes, gutka, chewing tobacco, zarda, unmanufactured tobacco, and bidis.

All goods, including aerated waters containing added sugar or other sweetening matter or flavoured, caffeinated beverages, carbonated beverages of fruit drink or carbonated beverages with fruit juice and other non-alcoholic beverages, excluding those specified at lower rates, will be covered under 40%, the FM said.

On mid-size and large cars, motorcycles of engine capacity exceeding 350cc, aircraft, for example, helicopters and aeroplanes for personal use, yachts and other vessels for pleasure or sports are all under 40%.

GST on food items cut to 5%

All the food items will see the reduction of GST from 12% or 18% to 5%. “Namkeen, bhujiya, sauces, pasta, instant noodles, chocolates, coffee, preserved meat, cornflakes, butter, ghee, all these items will fall under 5% tax slab." The FM said the government has provided a benefit reduction from 28 to 18%," says the FM.

“Air conditioners, air conditioning machines, TVs which are over 32 inches. All TVs are now at 18%. I want to underline, all TVs are now at 18%,” the FM said.

Zero GST on key items

The FM said dishwashing machines, small cars, and motorcycles equal to or less than 350cc are all coming to nil GST. There has been a reduction of GST from 12% to zero on 33 lifesaving drugs and medicines, and from 5% to zero on three lifesaving drugs and medicines used for the treatment of cancer, rare diseases and other severe chronic diseases.

There was also reduction of GST from 5% to zero on ultra-high temperature (UHT) milk, prepackaged and labelled chenna or paneer; all the Indian breads will also see zero rates (chapati or roti, paratha, parotta, etc).

Items that will attract 5% GST

Agriculture goods such as tractors, agricultural, horticultural, forestry machines for soil preparation or cultivation, harvesting or threshing machines, including straw or fodder balers, grass or hay movers, composting machines, etc., are all coming down from 12% to 5%, she said.

The GST Council has initiated a rate cut on handicrafts and labour-intensive sectors from 12% to 5%. “Handicrafts, marble, travertine blocks, granite blocks, intermediate leather goods. The reduction of cement from 28% to 18%. Health-related items—33 lifesaving drugs and medicines will see the rate cut come down from 12% to 0%. From 5 to 0 and 3 lifesaving drugs and medicines used for the treatment of cancer, rare diseases and other severe chronic diseases.”

Several drugs and medicines will see the GST rate coming down to 5% from 12%. Many other items, diagnostic kits, reagents, blood glucose monitoring systems, all of them will attract a reduced GST rate of 5%. Similarly, spectacles and goggles for correcting vision will also see a massive reduction in GST to 5% from the current 28%.

Small cars to see GST cut to 18%

There has been a uniform rate of 18% on all auto parts, irrespective of their HS code, while three-wheelers will attract a new GST rate of 18%, a big change from 28% earlier. Additionally, there has been a correction of the long-pending inverted duty structure for the manmade textile sector by reducing the GST rate on manmade fibre from 18% to 5% and manmade yarn from 12% to 5%.

The government will charge 18% GST, down from 28%, on small cars and motorcycles, which are equal to or below 350 cc. There has been a reduction of GST from 28% to 18% on buses, trucks and ambulances. "Three wheelers will see GST of 18% from 28% now."

Insurance services will also see GST from 18% currently go down to two, three different categories. The FM said there will exemption of GST on all individual life insurance policies, whether from term life, ULIP or endowment policies and reinsurance thereof, to make insurance affordable for the common man and increase insurance coverage in the country.

Tobacco products at 28%

The Finance Minister said that till the time loans taken for compensating the states during Covid do not get repaid, items like tobacco-related products will continue to be under 28%. After that, they will shift to 40%.

During the GST launch, the states were assured that 14% increase in their annual revenue for five years between July 1, 2017, and June 30, 2022, will be protected.

They were also guaranteed that any revenue shortfall would be compensated via a compensation cess levied on luxury and sin goods. However, during Covid, the central government borrowed a sum of ₹2.69 lakh crore in two tranches in FY21 and FY22, with which the states were compensated for the revenue gap during the pandemic.

India Inc. hails GST 2.0

India Inc. has given a thumbs up to the government's GST 2.0 regime. Anand Mahindra, Chairman, Mahindra Group, said more and faster reforms are the surest way to unleash consumption and investment. "Those, in turn, will expand the economy and amplify India’s voice in the world."

Anish Shah, Group CEO & MD, Mahindra Group, said the GST reforms announced today mark a defining moment in India’s journey towards building a simpler, fairer, and more inclusive tax system.

"The rationalisation measures will not only provide immediate relief to households but also strengthen key sectors such as automobiles, agriculture, healthcare, renewable energy, and MSMEs—all of which are vital to job creation and sustainable growth. The correction of long-pending inverted duty structures in critical industries is welcome," says Shah.

What are experts saying about GST 2.0

Mahesh Jaisingh, Partner & Indirect Tax Leader, Deloitte India, said the 56th GST Council meeting marks a pivotal moment in India’s tax reform journey. "Demonstrating exceptional commitment, the Council worked tirelessly and concluded the scheduled two-day meeting in just one day, with a clear aim of providing relief to businesses and consumers. A bold proposal to simplify the GST structure from four slabs to a streamlined two-tier system of 5% and 18%, along with a special 40% rate for sin goods, reflects the intent to enhance transparency and ease compliance," said Jaisingh.

Manoj Mishra, Partner and Tax Controversy Management Leader, Grant Thornton Bharat LLP, said the GST rate rationalisation is a watershed recalibration of India’s indirect tax system. "The 5% slab contributes only about 7% of collections, while the 12% slab adds a mere 5% but has been the source of persistent classification disputes and inverted duty structures. Streamlining these, alongside the creation of a new 40% slab for sin goods like pan masala, tobacco, and super-luxury items, broadens the revenue base even as the government absorbs an estimated ₹48,000 crore hit."

Mishra said the real impact lies in the consumer and sectoral gains. "Middle-class aspirations get a boost with ACs, TVs and washing machines now at 18%; agriculture becomes more cost-efficient with machinery and fertiliser inputs at 5%; FMCG essentials such as soaps, shampoos, and toothpaste shift to 5%, and packaged foods come under a simplified regime with the removal of the ‘pre-packaged and labelled’ distinction. The exemption of life and health insurance premiums further reduces household costs."