GST overhaul on the cards: Key changes explained
CHENNAI: India is preparing for its biggest overhaul of the Goods and Services Tax (GST) since its launch in 2017. On August 17, Prime Minister Narendra Modi signalled that a “next-generation” GST reform package could be rolled out by Diwali, with the aim of simplifying rates and resolving long-standing disputes.
The key proposal is to move from four tax slabs to a simpler two-rate structure—5% for essentials and 18% for most other goods. Luxury and sin items such as tobacco and high-end cars are expected to attract a higher levy, likely around 40%. The government has also indicated targeted relief measures, including lowering GST on small petrol and diesel cars from 28% to 18% and cutting or even removing GST on life and health insurance premiums.
These steps are aimed at making essential financial products more affordable and boosting demand in sectors like automobiles, consumer goods, and insurance. Final approval will rest with the GST Council, which will review recommendations from a panel of state ministers in the coming weeks.
If adopted, these reforms could have three major impacts. First, lower rates would reduce prices on everyday goods and certain big-ticket items, directly supporting consumption. Automakers, consumer staples, and cement producers are seen as major beneficiaries, with auto stocks already rallying on expectations of cheaper small cars.
Second, the reforms promise to clean up structural issues in the GST system, such as disputes over product classifications and the inverted duty structure that often traps working capital for businesses. Fixing these could cut compliance costs and help smaller firms. Third, reducing GST on insurance would encourage more households to buy policies, improving financial inclusion and strengthening long-term domestic savings.
Challenges remain. States will need to agree to the changes, and there are concerns about how much revenue might be lost in the short term. The government hopes that a higher levy on luxury items, along with stronger compliance, will keep collections steady. Timing is another issue, as a Diwali rollout leaves little room for businesses to adjust their systems to the new rules.
For investors, the reforms look positive in the medium term. Autos, cement, consumer goods, and insurers are likely winners, while luxury goods may face a higher tax burden. Analysts describe GST 2.0 as a “big-ticket reform” that could simplify India’s indirect tax system and strengthen growth, though much will depend on how smoothly it is rolled out and whether the Centre and states can strike a lasting balance between growth and revenue.