India has cut GST rates on hundreds of consumer items,—ranging from soaps to small cars—to spur demand in the world’s fourth largest economy in the face of punishing US tariffs.
The GST Council, headed by Union Finance Minister Nirmala Sitharaman, simplified the indirect tax system into a two-tier structure of 5% and 18% from a four-tier structure of 5%, 12%, 18% and 28%. An additional slab of 40% has been introduced for so-called sin goods and luxury items.
The new rates will come into effect on 22 September, the first day of Navratri.
“This reform is not just about rationalising rates. It is also on structural reforms. It’s also about ease of living, so that businesses can conduct their operations with the GST with great ease,” Sitharaman said in a late evening press conference on Wednesday.
“We have reduced the slabs. There shall be only two slabs. We are also looking at the issue of compensation cess.”
“These reforms have been carried out with a focus on the common man. Every tax on the common man’s daily use items has undergone a rigorous review, and in most cases, the rates have come down drastically.”
“Labour-intensive industries have been given good support. Farmers and the agriculture sector, as well as the health sector, will benefit.”
According to the finance minister, GST reforms have corrected the inverted duty structure, resolved classification-related issues, and “ensured that there will be stability and predictability about the GST”.
The move to reduce GST was first announced by Prime Minister Narendra Modi in his Independence Day speech on August 15.
After the cuts were approved on Wednesday, Modi said, “the wide-ranging reforms will improve lives of our citizens and ensure ease of doing business for all, especially small traders and businesses.”
New GST rates on cars, motorcycles, EVs
The GST Council has reduced the GST rate on small cars—less than four metres in length with petrol engines up to 1,200 cc and diesel engines up to 1,500 cc—to 18% from 28% at present. Any bigger or more powerful will attract 40% GST.
That’s set to boost the country’s largest carmaker Maruti Suzuki India Ltd. and its breadwinner small cars, as well as rivals Hyundai Motor India Ltd., Tata Motors Ltd. and Mahindra & Mahindra Ltd. to some degree.
A bigger change, however, is in the two-wheeler space.
Motorcycles with engine capacity up to 350 cc will now attract a tax rate of 18% as against 28% earlier, but bigger motorcycles go into 40%. That works to the advantage of Hero MotoCorp Ltd. and Honda Motorcycle and Scooter India Pvt. Ltd. but against Bajaj Auto Ltd. and Royal Enfield which are increasingly pushing into the middleweight category of motorcycles.
“At Mahindra, we view these reforms as transformative. They simplify compliance, expand affordability, and energise consumption, while enabling industry to invest with greater confidence,” Mahindra Group CEO Anish Shah said in a statement shared over WhatsApp.
“It strengthens India’s economic foundations and will help drive the next phase of equitable and inclusive growth-journey towards Viksit Bharat @2047.”
What’s in the 40% slab?
A whole bunch of tobacco products and luxury cars, and motorcycles.
The 40% rate is applicable only on few select goods, “predominantly on sin goods and few luxury goods and therefore is a special rate”, the GST Council said in a statement.
However, the new tax won’t kick in immediately for tobacco products like pan masala, cigarettes and chewing tobacco due to some technicalities involving pending loans.
Aerated waters, containing added sugar or flavour (which means most cold drinks), caffeinated beverages and other non-alcoholic beverages will also now attract 40% as against 28% earlier.
“Since it has been decided to end compensation cess, the levy is being merged with GST so as to maintain tax incidence on most goods,” according to FAQs to the new GST structure. “On other goods and services, the special rate has been applied as these were already attracting the highest GST rate of 28%.”
GST on insurance, medicines
The GST Council has exempt individual life insurance and health insurance policies from GST as part of broader reforms for the indirect tax regime.
All individual health insurance policies, including family floater and senior citizens, will be also be exempted under the new GST structure which will come into effect on September 22.
Other items exempt from GST are 33 life-saving drugs and medicines, cancer medicines, medication for rare diseases.
GST on cement, construction materials
The reduction in GST on cement and other building materials to 18% from 28% is set to boost the real estate sector immediately.
Affordable housing is set to benefit the most, as lower construction costs can be passed on to buyers, making homes more accessible and supporting the government’s ‘Housing for All’ mission, said experts.
GST 2.0 impact on govt revenue
The GST reforms are likely to cost the exchequer ₹48,000 crore annually, Revenue Secretary Arvind Shrivastava said during the press conference, but the hope is that it will be offset by higher consumption demand.
“The rate rationalisation can result in a buoyancy effect, as well as a positive effect on consumer behaviour,” he said. “We also expect compliance to increase with this exercise.”
Analyst Speak
This “GST 2.0” presents both an opportunity and a responsibility for India Inc., Saurabh Agarwal, tax partner at EY, told Hindustan Times.
“While lower rates will boost consumption and simplify compliance, businesses must proactively prepare for a smooth transition,” he said.
“Key focus areas include managing potential input tax credit accumulation on existing inventories and handling practical adjustments like MRP re-fixation across supply chains.”
“We also need to be vigilant about the inverted duty structure that may arise. A time-bound provisional refund mechanism would be a significant positive step, boosting liquidity and easing working capital pressures.”