GST Council slashes tax slabs to two to spur consumption; announces key measures for middle class

The GST Council on Wednesday rationalised the indirect tax structure, cutting the current four slabs down to two answering the Indian middle class’ long-pending demand. In a landmark decision that promises to ease household budgets and lift consumer sentiment, the Council scrapped the 12% and 28% rates, retaining only the 5% and 18% slabs.

Items earlier taxed at 12% and 28% will now largely migrate to the other two slabs, making a wide range of products cheaper and, policymakers hope, boosting consumption at a time when the economy is looking for fresh momentum.

The changes in GST rates of all goods except pan masala, gutkha, cigarettes, chewing tobacco products like zarda, unmanufactured tobacco and bidi, will be implemented with effect from September 22, 2025.

"Pan Masala, gutkha, cigarettes, chewing tobacco products like zarda, unmanufactured tobacco and bidi will continue at the existing rates of GST and compensation cess where applicable, till loan and interest payment obligations under the compensation cess account are completely discharged," the press release stated.

The reform comes weeks after Prime Minister Narendra Modi, in his Independence Day speech, promised a “Diwali gift” in the form of a GST overhaul. A Group of Ministers had subsequently vetted the Centre’s plan, which the Council endorsed at its September 3-4 meeting.

What gets cheaper and costlier?
Consumer durables such as air conditioners, televisions, refrigerators and washing machines will now attract 18% tax, down from 28%. Everyday essentials including ghee, nuts, bottled water (20 litres), namkeen, footwear, medicines and medical devices have been moved from the 12% slab to 5%. Common household goods like pencils, bicycles, umbrellas and hairpins will also become cheaper.

List of items that become cheap:

• Milk products: UHT milk is now exempt (earlier 5%), while condensed milk, butter, ghee, paneer, and cheese move to 5% or nil from 12%.
• Staples: Malt, starches, pasta, cornflakes, biscuits, chocolates and cocoa products drop from 12–18% to 5%.
• Dry fruits and nuts: Almonds, cashews, pistachios, hazelnuts and dates fall from 12% to 5%.
• Sugar and confectionery: Refined sugar, syrups, toffees and candies shift to 5%.
• Other packaged foods: Vegetable oils, edible spreads, meat and fish products, sausages, and malt-based foods brought under 5%.
• Namkeens and snacks: Bhujia, mixtures, chabena and similar packaged items cut from 12% to 5%.
• Drinking water: Mineral, natural and aerated waters without added sugar or flavour now taxed at 5% (down from 18%).
• Fertilisers and select crop inputs reduced from 12–18% to 5%.
• Life-saving medicines, some medical devices, and health products reduced from 12–18% to 5% or nil.
• Books, learning aids and other education items cut to nil or 5%.
• Electronics: Entry-level appliances move from 28% to 18%.
• Footwear and textiles: Reduced from 12% to 5%.
• Paper: Certain grades cut from 12% to nil.
• Personal care: Hair oil, shampoo, toothpaste and dental floss slashed from 18% to 5%.
• Renewable energy equipment reduced to 5% (from 12%).
• Construction materials cut from 12% to 5%.
• Sports goods, toys, leather, wood and handicrafts shifted to 5%.

Hence, from food and healthcare to education, textiles and energy, a wide set of items will now be cheaper, directly benefiting households, small businesses and consumers.

What stays costlier

• Sin Goods: Pan masala, gutkha, chewing tobacco, zarda, bidis and cigarettes remain under high GST plus cess until cess-related borrowings are repaid. Valuation will now be on Retail Sale Price (RSP) instead of transaction value to plug leakages.
• Sugary and flavoured drinks, including aerated waters, will see GST rise from 28% to 40%.
• Cigarettes, premium liquor and high-end cars remain in the top 40% slab.
• Imported armoured luxury sedans will only be exempt when brought in for official government use, such as by the President’s Secretariat.
• Coal, earlier taxed at 5%, will now attract 18%, increasing costs for coal-dependent industries.
• Restaurants in specified premises can no longer claim the 18% with input tax credit option.
• Lotteries and certain intermediary services face revised valuation rules, keeping their tax burden intact.

Industry upbeat on consumption boost
Market experts and consumer goods companies are optimistic that the changes will spur demand. Market veteran Vikas Khemani told ET Now that lower GST will improve affordability and leave households with more disposable income, particularly benefiting discretionary consumption.

FMCG players might be preparing to pass on the benefits. Britannia’s MD Varun Berry had said that shifting food products to 5% would directly boost demand, adding: “Biscuits are the cheapest food available everywhere, and consumption will rise once prices drop.” Wipro Consumer Care MD Vineet Agrawal echoed this view, saying reduced tax outgo will free up money for other categories.

Consumption tailwinds despite tariff worries
The GST rationalisation comes at a time when global trade headwinds and fresh tariff hikes have raised concerns about India’s export prospects. A recent 50% levy on Indian goods rattled markets, but analysts believe domestic demand will remain resilient.

“Consumption has been the strongest pillar of India’s growth story,” Khemani said, adding that lower interest rates, a good monsoon, and GST cuts are likely to trigger an upswing in household spending even as external trade frictions play out.

Health insurance relief
The Council has exempted health insurance from GST, reducing the burden from the earlier 18%. The move is expected to improve penetration in a country where less than one-fifth of people are covered by private health policies. While insurers and policyholders have welcomed the relief, some states flagged concerns about revenue loss.

What about government revenues?
SBI Research estimated that states will remain net gainers despite short-term pressures. GST revenues, including devolution, are pegged at over Rs 14.1 lakh crore this fiscal. While eight opposition-ruled states including Himachal Pradesh, Jharkhand, Karnataka, Kerala, Punjab, Tamil Nadu, Telangana and West Bengal warned of potential losses of Rs 1.5–2 lakh crore, SBI projected that states could still receive at least Rs 10 lakh crore in SGST and Rs 4.1 lakh crore via devolution in FY26.

The effective weighted average GST rate, which dropped from 14.4% at inception in 2017 to 11.6% in 2019, may now fall further to 9.5%. Evidence from earlier rationalisations suggests revenues dip initially but rebound strongly, with past rounds adding nearly Rs 1 trillion in collections.

GST journey
GST was rolled out on July 1, 2017, with four slabs of 5%, 12%, 18% and 28%. A compensation cess on luxury and demerit goods helped create a revenue pool to support states, though this mechanism ended in June 2022.

With the latest rationalisation, policymakers hope the simplified two-slab structure will deliver on the original promise of GST which was efficiency, affordability and a bigger consumption push for the Indian economy.