Finance Minister Nirmala Sitharaman. File.
| Photo Credit: Bijoy Ghosh

The story so far: On September 3, the GST Council authorised a new paradigm in the indirect tax regime. There will be fewer rates, and the Goods and Services Tax (GST) on most items have been reduced. While this has been welcomed by most sectors, there are some which are somewhat disgruntled. There are also concerns over the revenue implications.

Also read | GST Revamp: Who benefits? Full item-wise roundup

What prompted these changes?

The rationalisation of the multiple rates in GST has been on the anvil for a long time. The Council had in September 2021 constituted a Group of Ministers (GoM) to look into rate rationalisation. This GoM began its work, but seemingly little progress was made. The GoM was composed entirely of representatives from the States, with no representative from the Centre. So, in order to nudge it in the direction it wanted, the Union government had to make a proposal to the GoM. The Ministry of Finance on August 15, 2025, announced that it had submitted its proposal to the GoM. Earlier that same day, in his Independence Day speech, Prime Minister Narendra Modi had announced that these “next-generation” GST reforms would be a Deepavali gift to the nation.

By August 21, 2025, the GoM — following a briefing by Union Finance Minister Nirmala Sitharaman — had accepted the proposals and forwarded them to the GST Council. The Council then deliberated on these proposals on September 3 during a 10.5-hour-long meeting, following which it announced its decisions.

What are the changes?

The existing GST structure has multiple rates, even when considering only the main ones. The main rates comprise 0%, 5%, 12%, 18%, 28%, and a compensation cess over and above the 28% slab. This has been reduced to main slabs of 0%, 5%, 18% and 40%. The compensation cess for most items has been removed. It is still levied on tobacco products, but even that will be removed by the end of this calendar year, when the Centre pays back the loan it took to compensate States during the COVID-19 pandemic.

Apart from this, many items have been moved to lower tax slabs. According to an analysis by the State Bank of India’s economics research wing, of the 453 items that saw a change in their GST rate, 413 (or a little more than 91%) saw rates being cut, while 40 items saw rates increasing. The bulk of the rate reductions — 257 items, mostly common use products — were from the 12% to the 5% slab. Out of the 40 items that saw their rates increase, 17 were moved from the 28% slab to 40%. Here, it is important to note that the actual tax incidence might not have increased. For example, once the compensation cess is added, the effective tax rate on luxury cars and SUVs is 45-50%. That will go down to 40%.

Why were they necessary?

There are several reasons why the GST rate cuts make sense now. The first is that the legal period for the GST compensation cess will likely be coming to an end this calendar year. It can be levied up to March 31, 2026 or till when the Centre pays off its loans, whichever is earlier. Ms. Sitharaman said she expects the loans to be repaid this calendar year. The removal of this cess, without raising the base rates on tobacco products, would mean that these ‘sin’ goods would have suddenly become significantly cheaper. This is something the Union government could not be seen to be condoning. That set a time limit by when the new rates had to be implemented. The other reason is that the government expects some sort of detrimental impact from the 50% tariff imposed by the U.S. on imports from India. This is clear from the fact that, despite a strong 7.8% GDP growth in Q1 of this financial year, the government has not changed its 6.3%-6.8% growth estimate for the full year, implying it expects growth in the subsequent quarters to be significantly slower. The boost from the GST rate cuts is expected to offset this hit. The government, however, has officially denied any such connection, saying the GST changes were part of an overall reforms push and not related to the tariffs.

Which sectors were happy with the reforms?

The healthcare industry voiced its approval of the changes, saying the decision to reduce GST in the sector from 12% to 5% on a wide range of medical products would directly benefit patients. The renewable energy sector, too, praised the decision to reduce taxes on renewable energy components from 12% to 5%, saying this was a progressive step towards accelerating India’s clean energy transition. Consumer appliance makers were also upbeat about the cuts, saying it would boost demand, especially in the run-up to the festive season.

The real estate sector said that bringing down the GST rate on cement from 28% to 18%, and on other building materials such as granite slabs, would reduce costs for the sector and be a big boost. Auto manufacturers said the reduction of GST on cars and non-luxury bikes from 28% to 18% would spur demand.

Which sectors voiced reservations?

The textile industry welcomed the downward revision of GST rates for both man-made fibre and cotton sectors to 5%, but also voiced its disappointment over the 18% duty for garments priced above ₹2,500 each. They said that woollens, wedding apparel, and traditional Indian wear would become more expensive.

While auto manufacturers welcomed the rate rationalisation, dealers voiced some worries about consumers postponing their purchases until September 22, when the new rates come into force. They also called for greater clarity on what happens to the cess on vehicles they have bought from manufacturers but not yet sold.

The insurance sector will likely also see a mixed picture from the GST rate cuts. The exemption of personal life and health insurance from GST will increase insurance penetration, but the simultaneous removal of input tax credits might increase costs for insurers, thereby eating into their profits.

Editorial | Cuts in time: On the new GST system  

Airlines have collectively slammed the higher GST on non-economy seats, while vegetable oil producers said the Council could have resolved the inverted duty structure on edible oils — something it did for fertilizers and man-made textiles. The increase in the GST rate for labour charges from 12% to 18% has also led to some resistance from representatives of the MSME sector, who said their costs would increase.

What is the revenue impact?

The Centre said the revenue implication would be ₹48,000 crore based on consumption patterns in 2023-24. However, the real impact will be ascertained only when new data is obtained. The SBI research team estimates it to be a much smaller ₹3,700 crore. Opposition States, however, are worried. They have voiced their demand for a cess to be levied on items in the 40% slab, the proceeds of which can be used to compensate States for the revenue hit. This was not accepted by the Council. The States will have to look for their own sources, and the 16th Finance Commission, to make up any losses.

Published – September 07, 2025 02:23 am IST

The Goods and Services Tax (GST) Council, during its 56th meeting, decided to revamp the tax structure into a primarily two-rate system, as proposed by the Central government, Union Finance Minister Nirmala Sitharaman announced on Wednesday.

She added that the decisions would come into effect from September 22 for most items. Only tobacco and tobacco-related products will move to the new structure at a date to be specified by the Union Finance Minister.

Apart from the two rates of 5% and 18%, the new GST system would also include a 40% “special rate” on sin goods such as tobacco and luxury items such as large cars, yachts, and helicopters.

The government also calculated that the net fiscal implication of the rate cuts, based on consumption patterns in 2023-24, would be ₹48,000 crore. However, the officials clarified that the real implication would be known on the basis of current consumption, and that the rate rationalisation was expected to result in a buoyancy effect, and improved compliance.

“These reforms have been carried out with a focus on the common man,” Ms. Sitharaman said. “Every tax levied on the common man has gone through a rigorous looking into, and in most cases, the rates have come down. Labour-intensive industries have been given good support. Farmers and agriculture will benefit from the decisions. Health-related sectors will also benefit.”

Rate cuts for common man

She further said that common-use and middle-class items will see a reduction, with products such as hair oil, soap, shampoo, toothbrush, toothpaste, bicycle, table and kitchen ware, and other household articles being moved to 5% from either 18% or 12%.

The other items moving down to the 5% rate include namkeens, sauces, pasta, instant noodles, chocolates, coffee, and butter. Twelve specified bio-pesticides, bio-menthol, and labour-intensive items such as handicrafts, marble, travertine blocks, granite blocks, and intermediate leather goods would move from 12% to 5%.

Notably, cement will move from 28% to 18%.

The Finance Minister further explained that items such as ultra-high temperature milk, paneer, and all Indian bread, including rotis, chapatis, and parathas would see their tax rate fall to 0% from the earlier 5%.

Products such as air-conditioners, all TVs, dishwashers, small cars, and motorcycles of engine capacity less than or equal to 350cc would see their tax reduce from 28% to 18%. Buses, trucks and ambulances, as well as all auto parts, would also attract a GST rate of 18%.

The Finance Minister further said that 33 lifesaving drugs and medicines will move from 12% to 0%, while spectacles to correct vision would move from 28% to 5%.

Also read | Who are the members of the GST Council and what is their voting power?

Inversion rectified

“The long-pending inverted duty structure is being rectified for the manmade textile sector by reducing the GST rate on manmade fibre from 18% to 5% and manmade yarn from 12% to 5%,” Ms. Sitharaman said. “That will take care of every anomaly due to duty inversion in this sector.”

The inverted duty structure regarding the fertiliser will also be rectified, with the duty on sulphuric acid, nitric acid and ammonia being reduced from 18% to 5%.

The special rate of 40% will apply only on particular sin and super-luxury goods such as pan masala, cigarettes, gutka, chewable tobacco, zarda, unmanufactured tobacco and bidi, as well as goods including aerated water, caffeinated beverages, mid-size or large cars, motorcycles of engines exceeding 350 cc, helicopters and airplanes for personal use, and yachts or other vessels for private use.

On insurance services, individual life insurance policies and individual health policies will move to 0% from 18%.

Ms. Sitharaman further explained that the GST rate on pan masala, gutka, cigarettes, chewable and unmanufactured tobacco, and bidi would remain at 28%, in addition to a compensation cess, as currently in place.

Once the Centre discharges the loans it had borrowed to compensate States, these tobacco and tobacco-related items will move to the 40% slab. Ms. Sitharaman said the loan would likely be repaid within this calendar year.

Published – September 03, 2025 10:53 pm IST

Highlighting the devastating impact of the Pahalgam terror attack on the economy of Jammu and Kashmir, Chief Minister Omar Abdullah on Wednesday (September 3, 2025) sought the Centre’s support to deal with the situation.

The Union Territory (UT) was facing a severe fiscal crisis as its public revenues had “collapsed” in the aftermath of the April 22 terror attack in which 26 people were killed, he said.

Mr. Abdullah, who also holds the finance portfolio, told the 56th GST Council meeting in Delhi, that major economic sectors, including tourism, handicrafts, agriculture and horticulture, had come to a standstill after the attack.

Proposed GST reforms could further reduce the UT’s revenue by 10 to 12%, the Chief Minister said.

He was of the view that the GST Council could go ahead with rate rationalisation proposals, but suitable mechanisms should be devised to compensate states as well as UTs.

The Centre’s support to Jammu and Kashmir to deal with the fiscal crisis was critical, Mr. Abdullah emphasised.

“The major sectors of the economy, like tourism, transport, construction, and automobiles, have come to a standstill post April 2025. The proposed reform can further reduce our GST revenues by 10-12%.

“Hence, as the Finance Minister of Jammu and Kashmir, I am of the opinion that establishing suitable mechanisms and safeguards for the fiscal stability of States and UT’s is critical,” he said.

He highlighted the devastating impact of the event on the UT’s economy and called for the Centre’s support to deal with the situation, particularly in view of the proposed GST rate rationalisation.

“We may go ahead with the rate rationalisation proposal, while devising a mechanism for compensating States/UTs for their fiscal stability and creating safeguards for translating the benefits from rationalisation in the reduced prices to the masses of our country,” he said.

Mr. Abdullah stated that the GST reforms must consider the unique challenges faced by individual states and UTs.

He detailed how the local economy had been gaining renewed vigour before being “shocked” by the “Pahalgam incident” of April 2025. This event, and its aftermath, have brought major economic sectors—including tourism, handicraft, horticulture, and agriculture — to a standstill.

The Chief Minister also urged Union Finance Minister Nirmala Sitharaman-headed GST Council to address the “geopolitical challenges” facing the country and the severe fiscal pressures on his region following the terror attack.

He talked about substantial loss of jobs and businesses, and a decline in public revenues. “Today, all the sectors of economic activity, including tourism, handicraft, horticulture and agriculture, are badly affected. The flight of non-local workers has slowed down development of infrastructure projects,” the Chief Minister said.

Fully endorsing the two-tier (5 and 18%) GST structure proposal, the Chief Minister said, “My main concern is how do we ensure that this rate rationalisation eases the burden on the common man and makes these specific goods and services more affordable for the masses of our country.

“These often lead to classification disputes, inverted duty structures and compliance complexity. The recommendations of the Group of Ministers and the Union proposal deal with these distortions to a large extent and aim to minimise such aberrations. For the Trade and Industries, these will bring clarity, reduce litigation, and enhance compliance. Hence, I welcome and support the recommendations of the Group,” he said.

“We need to have systemic safeguards to assure us that the proposed rate changes result in major benefits for the consumers and are not cornered in the chain. There should not be any scope for profiteering from this rate rationalisation,” Mr. Abdullah said.

The Chief Minister also touched upon national economic issues, noting that the country’s growth path is “suddenly challenged by geopolitical challenges” and also pointed to “whimsical trade policies of the colonial era” that he said could restrict India’s access to 20% of the global market, affecting thousands of workers in sectors like agriculture, handicraft, and gems and jewellery.

Asserting that the GST, introduced in July 2017, remains the most ambitious federal tax reform in India’s fiscal history, he said that through these eight years, several steps and initiatives have been taken in tax structure, administrative mechanism, and technology frontier to improve efficiency and revenue mobilisation from GST, as also to facilitate honest taxpayers and dealers.

“The past year has been nothing but challenging for Jammu and Kashmir and for the entire nation. At the national level, we see our growth path suddenly challenged by geopolitical challenges.

“Our economy is steadily accelerating at a 6–7% growth rate. We have increased our export competitiveness and raised our share in global markets in goods and in services.

“Our forex reserves had quadrupled to $660 billion in the past two decades. But today we seek our market access being severely constrained by whimsical trade policies of the colonial era,” he said.

The Chief Minister said these policies will deprive us of about 20% of the global market and will seriously affect thousands of workers and entrepreneurs in the agriculture, handicraft, marine products, gems and jewellery sectors.

Published – September 03, 2025 08:41 pm IST

Union Finance Minister Nirmala Sitharaman and Union Minister of State for Finance Pankaj Chaudhary, during the 56th meeting of the GST Council, in New Delhi on September 3, 2025. Several CM’s of States attend the meeting.
| Photo Credit: ANI

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Image used for representative purpose only.
| Photo Credit: M. Periasamy

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