In a transformative move to ease the financial burden on consumers and stimulate economic growth, Finance Minister Nirmala Sitharaman announced a revamped Goods and Services Tax (GST) structure on September 3, 2025, following the 56th GST Council meeting in New Delhi. The council approved a streamlined two-tier tax system of 5% and 18%, with a special 40% slab for luxury and sin goods, set to take effect on September 22, 2025. This bold reform, backed by all states, aims to lower prices for everyday essentials, boost domestic consumption, and counter global trade challenges, marking a significant step toward a more inclusive economy.
A Simplified GST Framework
The new GST structure consolidates the previous four-tier system (5%, 12%, 18%, and 28%) into two primary slabs: 5% for essentials and 18% for most consumer goods. A third 40% slab will apply to sin goods like tobacco and luxury items such as high-end vehicles, replacing the expiring Compensation Cess. Approximately 99% of items currently taxed at 12%—including textiles, footwear, and food products—will shift to the 5% slab, while 90% of goods in the 28% bracket, such as refrigerators, air conditioners, and large TVs, will move to 18%. This overhaul, described as a “Diwali gift” by Prime Minister Narendra Modi, is expected to reduce consumer prices significantly.
Relief for the Common Man
The rate cuts target daily-use items to benefit the middle and lower classes. Essentials like hair oil, soap, shampoo, toothpaste, toothbrushes, bicycles, tableware, kitchenware, paneer, and Indian breads will now attract a 5% tax, with unpackaged milk products exempted entirely. “This is a pro-consumer reform that makes daily necessities more affordable,” Sitharaman said during the announcement. The move aligns with the government’s goal of easing inflationary pressures, with retail inflation projected to stabilize at 4.5% by October 2025, according to RBI estimates. Social media discussions on X highlight public enthusiasm, though some users question whether manufacturers will fully pass on the savings.
Boosting Domestic Consumption and Jobs
The GST rationalization is designed to spur domestic demand, a critical strategy as India faces 50% U.S. tariffs on $48 billion in exports, announced by the Trump administration in August 2025. By lowering tax rates, the government aims to increase purchasing power, encouraging manufacturers in labor-intensive sectors like automobiles, electronics, and textiles to ramp up production. Industry experts predict this could create 1.2 million jobs over the next two years, particularly in MSME-dominated sectors, according to a 2025 CII report. The reforms are expected to offset the ₹47,700 crore revenue loss through higher consumption, with domestic demand projected to rise by ₹5.5 lakh crore, equivalent to 1.7% of GDP.
Unanimous Support Amid Fiscal Concerns
The 10.5-hour meeting saw rare consensus among states, with Bihar’s Deputy Chief Minister Samrat Choudhary emphasizing the collective decision to prioritize consumer relief. However, non-BJP-ruled states like West Bengal and Tamil Nadu raised concerns about the ₹47,700 crore revenue deficit, demanding compensation mechanisms. Uttar Pradesh Finance Minister Suresh Khanna noted that discussions on additional levies for demerit goods, potentially exceeding 40%, were deferred to the next meeting in late September. The council is also exploring pre-filled GST returns and digital invoicing to curb evasion and ensure fiscal stability.
Strategic Response to Global Challenges
The timing of the reforms is strategic, addressing both domestic and international economic pressures. The shift to lower tax slabs aims to make Indian goods more competitive domestically, countering the impact of U.S. tariffs. The council’s focus on sectors like renewable energy, agriculture, and handicrafts aligns with India’s Atmanirbhar Bharat initiative, promoting self-reliance. Additionally, the GSTN is rolling out AI-driven compliance tools to streamline processes for 1.4 crore registered businesses, reducing administrative burdens and enhancing transparency, with full implementation expected by March 2026.
You Learn: A New Era for GST
Dubbed “GST 2.0,” these reforms mark a pivotal shift toward a simpler, consumer-friendly tax regime. The council’s decision to exempt health and life insurance premiums from GST, currently under review, could further ease financial burdens for millions. With the new rates effective from September 22, 2025, businesses are gearing up for a festive season boost, particularly in retail and e-commerce. As India navigates global trade uncertainties, the GST overhaul positions the economy for resilient growth, balancing consumer relief with sustainable fiscal policies.
