For Prime Minister Narendra Modi, the Independence Day address has increasingly become a platform for signalling big economic shifts. In 2025, that tradition continued, with the Prime Minister announcing the government’s intent to roll out next-generation Goods and Services Tax (GST) reforms—positioned as a Diwali gift to citizens and businesses alike.
What followed was one of the most consequential overhauls of India’s indirect tax regime since GST was introduced in 2017.
Within weeks of the August 15 announcement, the finance ministry moved swiftly. Finance Minister Nirmala Sitharaman unveiled the details on September 3 and set September 22 as the implementation date for the largest GST rate rationalisation exercise so far—well ahead of what many in industry had expected.
From Four Slabs to Two
At the heart of GST 2.0 was a decisive simplification of rates. The earlier four-slab structure—5%, 12%, 18% and 28%—was dismantled. In its place came a leaner framework: a 5% merit rate, an 18% standard rate, and a single 40% rate reserved for luxury and sin goods.
The reclassification triggered widespread changes across product categories. Several essential and mass-consumption items—such as butter, ghee, biscuits, pasta and other daily-use goods—were shifted to the 5% slab from 12% or 18%, easing the tax burden on households.
Standard goods, including cement and paints, were brought under the 18% bracket, where most services already sat. The real consumer-facing impact, however, came from changes in the automobile and consumer durable segments.
Basic two-wheelers and four-wheelers were moved from the punitive 28% plus cess regime to 18%, significantly improving affordability. Large appliances such as televisions, refrigerators and washing machines also saw their GST rates cut from 28% to 18%.
Narrowing the Sin Goods List
The GST Council also cleaned up the list of luxury, sin and demerit goods, sharply narrowing its scope. Items such as aerated beverages and luxury cars were retained in this category, but with a simplified tax structure.
Instead of a 28% GST plus a cess of up to 12%, these goods now attract a flat 40% GST—keeping the overall tax incidence unchanged while reducing complexity. The same flat rate now applies to luxury cars.
Relief on Medicines and Insurance
One of the most socially impactful elements of the reform came in healthcare-related categories. A wide range of medicines were moved from the 12% slab to either zero-rated or nil GST, lowering prices for consumers.
In a move that addressed long-standing demands, GST on essential services such as health and life insurance premiums was cut from 18% to nil, providing direct relief to policyholders and improving insurance penetration.
Why the Government Pushed Ahead
The government’s confidence in executing such a sweeping reform rested on two factors. First was the need to revive consumption in a slowing global environment. Second was the strength of GST collections.
For most of the financial year, monthly GST revenues averaged close to ₹2 lakh crore, offering fiscal comfort. Even when collections dipped to around ₹1.7 lakh crore in early December—the first month reflecting the full impact of GST 2.0—the government maintained that revenues remained robust.
Officials have pointed to early signs that simpler slabs, improved compliance and higher consumption are helping sustain tax buoyancy despite rate cuts.
Tobacco and Pan Masala: Reform Deferred, Not Abandoned
One major category was left untouched during the September overhaul—cigarettes, tobacco products and pan masala. These continue to attract 28% GST plus compensation cess, as cess collections are still being used to repay loans taken to compensate states for revenue losses during the COVID-19 period.
However, legislative clarity arrived later in the year. The Health Security and National Security Cess Bill, 2025, and the Central Excise Amendment Bill, 2025, outline the roadmap once these loans are repaid.
Under GST 2.0, tobacco and pan masala products are expected to move to the 40% demerit slab, with new cesses and higher central excise duties making up the difference. The aim is to retain the existing tax incidence, preventing revenue shocks while keeping retail prices broadly stable.
A Defining Year for GST
For the Goods and Services Tax, 2025 was far more than a year of incremental adjustments. It marked a structural evolution—towards fewer slabs, lower compliance friction, stronger collections and sharper enforcement.
By balancing rate cuts with revenue stability, and simplicity with fiscal prudence, GST 2.0 has reset the indirect tax framework—while placing consumption revival firmly back on the policy agenda.
