GST 2.0 Reforms

Context:

On September 3, 2025, the GST Council, chaired by Union Finance Minister Nirmala Sitharaman, held its 56th meeting which lasted over 10 hours. The meeting marked the biggest overhaul of the eight-year-old Goods and Services Tax (GST) regime, approving the much-awaited GST 2.0 reforms.

Slab Rationalisation

• Previous Structure: 5%, 12%, 18%, 28%
• New Structure (from 22 Sept 2025):
  • 5% (Merit rate) – essential/common goods & services
  • 18% (Standard rate) – general goods & services
  • 40% (Demerit rate) – sin/super luxury goods (tobacco, cigarettes, pan masala, big cars, etc.)

Rate Reductions for Common & Middle-Class Items

0% (Exempted)

• Food items: Ultra-high temperature (UHT) milk, paneer, Indian breads (roti, chapati, paratha), pizza bread, khakra.
• Education item: Erasers.
• Insurance: All life insurance & health insurance policies (individual, family floater, senior citizens, ULIPs, endowment).
• Healthcare: 33 life-saving medicines.

5% (Reduced from 12–18%)

• Household essentials: Hair oil, soaps, shampoos, toothbrush, toothpaste, bicycles, tableware, kitchenware.
• Food & FMCG: Packaged juices, butter, cheese, condensed milk, pasta, coconut water, soya milk drinks, nuts, sausages, namkeens, sauces, noodles, chocolates, coffee.
• Medical: Medical oxygen, gauze, bandages, diagnostic kits.
• Others: Bio-pesticides, bio-menthol, handicrafts, leather goods, granite & marble blocks.
• Electric Vehicles (EVs): retained at 5%.
• Gyms, salons, barbers, yoga centres: reduced to 5% from 18%.

18% (from 28% or 12%)

• White goods: Air conditioners, TVs, dishwashers.
• Cement.
• Automobiles:
  • Small cars (≤1200cc petrol / ≤1500cc diesel, ≤4m length).
  • Motorcycles (<350cc).
  • Automotive parts.

40% (Demerit Rate)

• Tobacco, cigarettes, pan masala.
• Big cars/Super luxury vehicles.

Structural Reforms

• Inverted Duty Structure corrected:
  • Manmade fibre: 18% → 5%
  • Manmade yarn: 12% → 5%
  • Fertiliser inputs (sulphuric acid, nitric acid, ammonia): 18% → 5%
• Ease of Doing Business:
  • Automated GST refunds.
  • Simplified MSME registration.

Fiscal Impact

• Net revenue implication: ₹48,000 crore (FY24 base).
• Consensus-based decision despite states’ revenue loss concerns (~₹80,000 cr – ₹1.5 lakh cr).

Significance

• Major move towards simplified GST 2.0.
• Relief for common man, MSMEs, labour-intensive industries, farmers.
• Boosts compliance, reduces disputes & litigation.
• Corrects duty structure distortions.
• Encourages demand growth while ensuring fiscal sustainability.