The Centre and states on Wednesday approved the biggest overhaul of the country’s goods and services tax (GST), eight years after it was launched. The GST Council, apex decision making body for the levy, unanimously approved sweeping cuts in rates on scores of items of daily use, making most goods and some services cheaper.
Finance Minister Nirmala Sitharaman said the new rates will take effect on September 22, the first day of Navratri and start of the festival season, delivering on Prime Minister Narendra Modi’s Independence Day promise of a GST Diwali bonanza.
“We have reduced slabs… corrected the inverted duty structure... These reforms have been carried out keeping in mind the common man,” said Sitharaman, adding that these steps will give a boost to key drivers of the economy.
GST will now shift to a two-slab structure, 5% and 18%, abolishing the 12% and 28% rates, a rationalisation that’s expected to help lower prices and boost consumption. It is expected to make compliance simpler and improve ease of doing business, driving growth in a climate of global economic uncertainty. The boost to the economy from reforms is pegged at 20-30 basis points, offsetting the impact of 50% US tariffs.
Net fiscal implication of these tax reductions is estimated at Rs 48,000 crore, but the finance ministry expects buoyancy as rate rationalisation and better compliance will balance impact.
Correcting Inverted Structure
Also Read: GST Council slashes tax slabs to two to spur consumption
“The entire exercise will be fiscally sustainable for both the Centre and states,” said revenue secretary Arvind Srivastava. There is no move to bring back anti-profiteering measures as the council expects the industry to pass on tax cut benefits to the consumer, he said.
The council, which met under the chairmanship of Sitharaman, brought all so-called ‘sin’ items such as tobacco products and super luxury items under a special 40% slab. This will also apply to aerated water, carbonated beverages, caffeinated drinks, mid-sized and large cars, motorcycles of over 350 cc, aircraft for personal use and yachts. However, the new rate will not come into effect for tobacco products, gutkha and pan masala and compensation cess would continue to be levied upon them until state loans are repaid.
About 400 commonly used items such as food products, oil, toiletries, air-conditioners, large television sets and select consumer durables, small cars, motorcycles, auto components, spectacles, cement and lifesaving and cancer medicines will face lower tax rates.
A significant reform is slashing GST on individual health and life insurance premiums to nil, with the council agreeing to exempt them from the 18% tax levied now.
Most items of daily use will move to the 5% bracket with the scrapping of the 12% levy. Some goods such as Indian breads and paneer will face nil tax. Others such as cement and small cars, which were in the 28% slab, will move to 18%.
These changes seek to correct the inverted duty structure in GST and cut down on the accumulation of input tax credit to boost domestic value addition while resolving classification issues in goods. “This reform was the need of the hour,” Sitharaman said, adding that slab changes are being accompanied by process reforms to make it easier for companies to do business.
LIFTING SPENDING
GST has had four tax slabs—5%, 12%, 18% and 28%—besides special rates for bullion since its July 1, 2017, launch, subsuming multiple state and central taxes and turning India into a common market. A compensation cess in the range of 1% to 290% was introduced on luxury and demerit goods to compensate states for any loss of revenue in transition. This compensation cess is being removed.
The Prime Minister, in his Independence Day speech, said GST reform was imminent. “I am going to make it a double Diwali for you… We have discussed with states and we are bringing next-generation GST reforms that will reduce the tax burden,” he had said.
Sitharaman said on Wednesday, “We are all together for the common man… Every state finance minister agreed and supported.”
Economists expect the reform to lift spending activity and GDP. The boost to nominal GDP growth is estimated at 20-30 bps. The Indian economy grew by asurprise 7.8% in the first quarter and 8.8% in nominal terms.
“The rationalisation of GST is expected to spur consumer demand in H2 of FY26, adding around 20 bps to GDP growth,” said Sakshi Gupta, principal economist at HDFC Bank. “This could help offset some of the adverse effects of higher tariffs on the country’s growth this fiscal year. Lowand middle-income households, given their higher price sensitivity, are likely to benefit the most from the revised GST rates.”
OTHER CHANGES
The council’s ease of doing business measures include ensuring the GST registration process is completed in three days in the case of non-risky ventures. Refunds stuck because of the inverted duty structure in export-intensive sectors such as textiles, chemicals, fertilisers and pharmaceuticals sectors will be cleared within seven days. The council approved amendments in the definition of place of supply for intermediaries, a move which will allow global capability centres (GCCs), data centres and IT services to claim input tax credit.
A simplified process to grant registration automatically to those with a total tax liability that does not exceed Rs 2.5 lakh per month was also approved. The latest GST reform rests on three pillars — structural reforms, rate rationalisation and ease of living.
Structural reforms would ensure stability and predictability by providing “long-term clarity on rates and policy direction to build industry confidence and support better business planning,” Sitharaman said.
The revamp will make it easier for companies to function, she had said on Tuesday at an event in Chennai. “The next generation GST reforms... will set an economy absolutely open and transparent in the coming months and, with further reduction in compliance burden, (reforms) will be making it easier for small businesses to thrive,” she said.
Finance Minister Nirmala Sitharaman said the new rates will take effect on September 22, the first day of Navratri and start of the festival season, delivering on Prime Minister Narendra Modi’s Independence Day promise of a GST Diwali bonanza.
“We have reduced slabs… corrected the inverted duty structure... These reforms have been carried out keeping in mind the common man,” said Sitharaman, adding that these steps will give a boost to key drivers of the economy.
GST will now shift to a two-slab structure, 5% and 18%, abolishing the 12% and 28% rates, a rationalisation that’s expected to help lower prices and boost consumption. It is expected to make compliance simpler and improve ease of doing business, driving growth in a climate of global economic uncertainty. The boost to the economy from reforms is pegged at 20-30 basis points, offsetting the impact of 50% US tariffs.
Net fiscal implication of these tax reductions is estimated at Rs 48,000 crore, but the finance ministry expects buoyancy as rate rationalisation and better compliance will balance impact.
Correcting Inverted Structure
Also Read: GST Council slashes tax slabs to two to spur consumption
“The entire exercise will be fiscally sustainable for both the Centre and states,” said revenue secretary Arvind Srivastava. There is no move to bring back anti-profiteering measures as the council expects the industry to pass on tax cut benefits to the consumer, he said.
The council, which met under the chairmanship of Sitharaman, brought all so-called ‘sin’ items such as tobacco products and super luxury items under a special 40% slab. This will also apply to aerated water, carbonated beverages, caffeinated drinks, mid-sized and large cars, motorcycles of over 350 cc, aircraft for personal use and yachts. However, the new rate will not come into effect for tobacco products, gutkha and pan masala and compensation cess would continue to be levied upon them until state loans are repaid.
About 400 commonly used items such as food products, oil, toiletries, air-conditioners, large television sets and select consumer durables, small cars, motorcycles, auto components, spectacles, cement and lifesaving and cancer medicines will face lower tax rates.
A significant reform is slashing GST on individual health and life insurance premiums to nil, with the council agreeing to exempt them from the 18% tax levied now.
Most items of daily use will move to the 5% bracket with the scrapping of the 12% levy. Some goods such as Indian breads and paneer will face nil tax. Others such as cement and small cars, which were in the 28% slab, will move to 18%.
These changes seek to correct the inverted duty structure in GST and cut down on the accumulation of input tax credit to boost domestic value addition while resolving classification issues in goods. “This reform was the need of the hour,” Sitharaman said, adding that slab changes are being accompanied by process reforms to make it easier for companies to do business.
LIFTING SPENDING
GST has had four tax slabs—5%, 12%, 18% and 28%—besides special rates for bullion since its July 1, 2017, launch, subsuming multiple state and central taxes and turning India into a common market. A compensation cess in the range of 1% to 290% was introduced on luxury and demerit goods to compensate states for any loss of revenue in transition. This compensation cess is being removed.
The Prime Minister, in his Independence Day speech, said GST reform was imminent. “I am going to make it a double Diwali for you… We have discussed with states and we are bringing next-generation GST reforms that will reduce the tax burden,” he had said.
Sitharaman said on Wednesday, “We are all together for the common man… Every state finance minister agreed and supported.”
Economists expect the reform to lift spending activity and GDP. The boost to nominal GDP growth is estimated at 20-30 bps. The Indian economy grew by asurprise 7.8% in the first quarter and 8.8% in nominal terms.
“The rationalisation of GST is expected to spur consumer demand in H2 of FY26, adding around 20 bps to GDP growth,” said Sakshi Gupta, principal economist at HDFC Bank. “This could help offset some of the adverse effects of higher tariffs on the country’s growth this fiscal year. Lowand middle-income households, given their higher price sensitivity, are likely to benefit the most from the revised GST rates.”
OTHER CHANGES
The council’s ease of doing business measures include ensuring the GST registration process is completed in three days in the case of non-risky ventures. Refunds stuck because of the inverted duty structure in export-intensive sectors such as textiles, chemicals, fertilisers and pharmaceuticals sectors will be cleared within seven days. The council approved amendments in the definition of place of supply for intermediaries, a move which will allow global capability centres (GCCs), data centres and IT services to claim input tax credit.
A simplified process to grant registration automatically to those with a total tax liability that does not exceed Rs 2.5 lakh per month was also approved. The latest GST reform rests on three pillars — structural reforms, rate rationalisation and ease of living.
Structural reforms would ensure stability and predictability by providing “long-term clarity on rates and policy direction to build industry confidence and support better business planning,” Sitharaman said.
The revamp will make it easier for companies to function, she had said on Tuesday at an event in Chennai. “The next generation GST reforms... will set an economy absolutely open and transparent in the coming months and, with further reduction in compliance burden, (reforms) will be making it easier for small businesses to thrive,” she said.
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