India’s Goods and Services Tax (GST) regime is undergoing its most significant transformation since its inception in 2017. Dubbed GST 2.0, this comprehensive set of reforms, announced after the 56th GST Council meeting on September 3, aims to simplify the tax structure, ease compliance, boost consumption, and fuel economic growth ahead of the festival season. The changes come into effect from September 22.
The genesis: A promise from Red Fort
The journey to GST 2.0 began with a promise. In his Independence Day address, Prime Minister Narendra Modi announced from the ramparts of the Red Fort his government’s intent to usher in next-generation GST reforms by Diwali. Terming it as a gift to the nation, the PM pledged reforms that would reduce the tax burden on the common man and provide a direct boost to economic activity. This set the stage for the GST Council's decisive meeting on September 3, where months of deliberation by a Group of Ministers (GoM) on rate rationalisation were finally put to work.
In an interview to a media house, Finance Minister Nirmala Sitharaman said the seeds of the major overhaul were sowed by Prime Minister Narendra Modi during a conversation eight months ago, when he asked her to do something with the GST rules (for ease of doing business) and later with the rates.
Three-pillar approach
The reforms were based on three core pillars — structural changes, rate rationalisation and ease of living and doing business.
The structural changes include addressing long-standing issues like the inverted duty structure (where inputs are taxed higher than finished products) and resolving classification disputes. Rate rationalisation involves moving from a complex multi-slab system to a simplified two-rate structure for the vast majority of goods and services; and ease of living and doing business involves implementing process reforms to make compliance simpler, faster, and more predictable for businesses, especially MSMEs and exporters.
Slab simplification and rate changes
The most dramatic shift is the consolidation of tax slabs. The old structure of 5%, 12%, 18%, and 28% (plus cess on certain items) has been largely replaced by a two-tier system —5% Merit Rate (for essential and common-use items); 18% Standard Rate (for most other goods and services) and a new 40% ‘Special Rate’ that replaces the old 28% plus cess slab for a handful of "sin" and luxury goods.
The consolidation of slabs was accompanied by a major exercise to bring down the GST rates on goods and services. As many as 391 items saw changes in rates with 357 items seeing a lowering of GST rates charged currently.
Key goods moving to the 5% slab
A wide range of daily-use items have become cheaper, effectively putting more money in the hands of consumers. This includes food items (namkeen, sauces, pasta, instant noodles, chocolates, butter, ghee); personal care goods (toilet soaps, shampoos, hair oil, toothpaste, toothbrushes); household goods (kitchenware, tableware, bicycles); agri inputs (tractor components, irrigation equipment, harvesting machinery); health products (diagnostic kits, reagents, spectacles, and vision-correcting goggles) and renewable energy equipment (solar panels and other devices).
Key goods moving to the 18% slab (from 28%)
In a major relief to the automotive sector and aspirational consumer durables -- automobiles (small cars, motorcycles up to 350cc, buses, trucks, ambulances, and all auto parts); consumer durables (TVs of all sizes, air conditioners, dishwashers, monitors) and batteries (all batteries, including lithium-ion) — all of them are now uniformly taxed at 18%.
Items attracting new 40% rate
This rate subsumes the old tax and compensation cess. It applies to sin goods (pan masala, cigarettes, chewing tobacco (though these will transition later); aerated beverages & caffeinated drinks; high-end luxury Items like large cars and SUVs, aircraft for personal use, yachts; and actionable claims like lottery tickets, betting, gambling, casinos, and admission to high-value events like IPL matches.
Though larger cars and SUVs are now put under the 40% slab (against 28% earlier), yet they are going to attract lower taxes. Reason: currently mid-size and big cars attract 28% GST and compensation cess ranging from 17-22% with the overall tax incidence ranging from 45-50%. The new GST rate on mid-size and big cars will be 40% with no compensation cess. Auto makers have already started announcing rate reductions with popular SUVs like Harrier, Safari, Scorpio to cost lower by up to `1.5 lakh. Luxury cars like BMWs and Mercedes could see prices coming down by lakhs of rupees.
Health gets special attention
Rates on health-related items have seen sharp cuts. As many as 33 life-saving drugs and medicines have been reduced to zero, while several others have been brought down from 12% or 5% to zero. Three critical medicines for cancer, rare diseases, and chronic illnesses have also moved to zero. Diagnostic kits, reagents, and glucose monitoring systems have been reduced to 5%. Spectacles and vision-correcting goggles have been cut from 28% to 5%. Individual health and life insurance have been exempted from GST. Earlier, premiums paid towards these policies were taxed at 18%.
Ease of doing business
Beyond rates, GST 2.0 introduces significant process reforms to reduce the compliance burden. The reform includes a simplified registration automated system for small and low-risk applicants promising registration within three working days. A risk-based system will be put in place to provisionally release 90% of refund claims for exporters and those under inverted duty structure, with only high-risk cases facing scrutiny.
Amendments will be made in the law to allow post-sale discounts through credit notes, removing the need for pre-supply agreements and ending a major source of disputes.
Unanswered questions and challenges
Though the sweeping changes were approved by the GST Council unopposed, states did voice their concern on revenue loss to the states due to sharp lowering of rates. The net revenue implication of the rate cuts is estimated at `47,700 crore. While the Centre has termed it a "fiscal implication" rather than a loss, states are concerned about their share.
Kerala finance minister in a letter to the Union finance minister says that “the current rationalisation framework considers revenue neutrality at national level, but consumption patterns differ across states with consumption in states like Kerala skewed towards items with higher rates, and therefore, may stand to lose more than others.
Though analysts and economists predict a consumption boost may partially offset the potential revenue loss, the mechanism to address this permanent revenue shortfall for states has not been detailed, and this could potentially become a point of contention in future Council meetings.
The cess on tobacco products (cigarettes, beedi, pan masala, etc.) will continue until the loans taken to compensate states are fully repaid. While officials hint at a November-December timeline for this, no firm date has been set, creating uncertainty for these industries.
The fate of the anti-profiteering agency
The government has been silent on whether the National Anti-Profiteering Authority (NAA) will be revived even though there have been hints of reviving the same for a short-period to ensure rate cut benefits are passed on to consumers.
NAA was initially set up to ensure businesses passed on the benefits of GST rate cuts to consumers. With such widespread reductions, there is a strong demand from consumer groups to reactivate the NAA to prevent businesses from unjustly enriching themselves. The government’s stance on this is unclear. “The earlier framework under the National Anti-Profiteering Authority (NAA) was criticised for its protracted investigations, lack of clarity in methodology, and the perception of being more punitive than corrective. However, the principle behind such a mechanism—ensuring that tax reductions and input tax credits actually benefit end consumers—remains sound and relevant,” said Rajat Mohan, Senior Partner, AMRG & Associates.
Cases of non-compliance were frequent. Several consumer goods majors — including Hindustan Unilever, Jubilant Foodworks, Patanjali, Reckitt Benckiser, and Procter & Gamble — faced action. The latest case was closed in August 2025, when Subway franchisee Urban Essence was found guilty of profiteering `5.47 lakh by withholding tax-cut benefits.
Logistical challenge for businesses
Implementing these changes from September 22, is a massive operational challenge. Businesses will need to reassess retail pricing, distributor contracts, and inventory, while ensuring smooth communication with consumers. Analysts warn that the transition could create input tax credit (ITC) complications, particularly under the inverted duty structure, leaving industries like restaurants and food delivery uncertain about refunds.
Operational readiness—handling stock, pricing, and distributor agreements—will be critical. While lower raw material costs and logistics savings are expected to benefit manufacturers, companies must also rethink promotional strategies, especially as goods move into lower tax brackets, enabling more customer-focused schemes. Digital channels and e-commerce platforms will need updates to settlement models and HSN classifications.
By simplifying the structure and lowering taxes on a vast array of goods and services, the GST reform aims to boost consumption, curb inflation, and support key sectors like manufacturing, agriculture, and healthcare. However, the success of this reform will depend on effective implementation and the government’s ability to address the concerns of its key stakeholders, including the states.