Two-Slab GST Reform Likely To Boost Consumption, Ease Prices Of Daily Needs

India is preparing for its most significant indirect tax reform since the launch of the Goods and Services Tax (GST) in 2017. The GST Council, chaired by Finance Minister Nirmala Sitharaman and comprising representatives from 31 states and union territories, is meeting in New Delhi today and tomorrow for its 56th session to deliberate on sweeping changes to the current structure.

Hon’ble Prime Minister Shri @narendramodi has also recently announced the creation of a ‘Task Force for Next-Generation Reforms’, with a clear mandate to simplify regulations, lower compliance costs, and build a more enabling ecosystem for start-ups, MSMEs and entrepreneurs.… pic.twitter.com/xHHWpZTmPB

— Nirmala Sitharaman Office (@nsitharamanoffc) September 2, 2025

The proposal seeks to collapse the existing four-tier system into a simpler two-rate structure that could bring down prices of daily-use items, rationalise compliance, and provide a major consumption boost.

At the heart of the reform is a new two-slab regime: a 5 per cent “merit rate” for essential and common-use goods, and an 18 per cent “standard rate” for most other items.

In addition, a special 40 per cent “sin tax” is proposed for products such as tobacco, pan masala, luxury cars, and certain gambling activities. This overhaul is expected to resolve long-standing issues of classification disputes, reduce litigation, and simplify GST for both businesses and consumers.

Read Also: PM Modi’s Key Announcements During India’s 79th Independence Day Speech

If approved, the changes will mean that nearly all goods currently taxed at 12 per cent will shift down to 5 per cent, directly lowering the cost of packaged food, dairy products, household staples, textiles, and renewable energy equipment.

Similarly, around 90 per cent of items now in the highest 28 per cent bracket will be moved to the 18 per cent slab. Big-ticket products like air conditioners, refrigerators, dishwashers and televisions are likely to become more affordable, while individual health and life insurance could be fully exempt from GST.

Smaller cars may also see their tax burden reduce significantly, whereas luxury SUVs and imported vehicles will face the higher 40 per cent category.

In addition to cheaper goods, the Centre’s plan includes major steps to simplify the compliance burden on businesses. Processes for registration, return filing, and refunds will be automated and technology-driven, with pre-filled returns and faster clearances for exporters and small enterprises.

Read Also: Top Industrialist’s Warning On India’s 4th Largest Economy Feat

The proposal also seeks to resolve the problem of “inverted duty structures,” where companies pay higher tax on inputs than on finished goods, leading to blocked working capital and delays in refunds. By aligning rates more consistently, the reform is designed to bring stability and predictability to India’s eight-year-old GST system.

The reform is not only about easing lives for consumers and businesses but also about strengthening the economy. The government believes rationalisation will spur household consumption, especially among the middle class, which in turn will help offset the expected revenue shortfall.

Initial estimates suggest that while there could be an immediate revenue loss of around ₹70,000–80,000 crore, improved compliance and increased spending could balance the books over time.

A recent SBI Research report also projected that GST changes, alongside income tax cuts, could push consumption higher by over ₹5.3 lakh crore, equivalent to 1.6 per cent of GDP.

The timing of the reform is critical. India recently posted a GDP growth rate of 7.8 per cent in the first quarter of FY26, well above expectations, and global ratings agencies have expressed confidence in the country’s trajectory.

The government hopes that by making essential goods cheaper and streamlining the tax system, it can strengthen India’s push to become the world’s third-largest economy while deepening its “aatmanirbhar” or self-reliance agenda.

However, not everyone is on board. Several opposition-ruled states, including Tamil Nadu, Punjab, and West Bengal, have raised concerns over potential revenue losses.

They argue that while the proposal is pro-people, states could lose between 15–20 per cent of their GST revenues, which translates to a shortfall of ₹85,000 crore to ₹2 lakh crore annually.

To address this, these states are demanding a guaranteed compensation mechanism for at least five years, or an additional levy on sin and luxury goods beyond the proposed 40 per cent rate. They have also suggested that, if needed, the Centre borrow against future cess collections to cover the gap.

Another challenge lies in ensuring that the benefits of lower tax rates actually reach consumers rather than being absorbed as higher margins by companies.

Past experience has shown that rate cuts do not always translate into reduced retail prices. States have therefore urged the Centre to set up strict monitoring to prevent windfall gains for corporates.

Despite these challenges, there is a broad consensus that the current four-slab GST system has become overly complex and riddled with disputes.

Cases such as “roti versus parotta” or “fryums versus papad” became emblematic of the confusion created by different rates for similar products. By merging slabs and applying uniform rates, the proposed structure seeks to eliminate such ambiguities and bring clarity across sectors, including agriculture, textiles, health, construction, transport, and renewable energy.

This reform is also significant because the compensation cess, introduced in 2017 to cover state revenue losses during the transition to GST, is set to expire in October.

The new system will replace cess-based taxation with the higher 40 per cent slab for demerit goods, maintaining overall tax incidence on products like tobacco while creating a stable revenue stream.

For common citizens, the promise is simple: essential goods may become cheaper, insurance more accessible, and compliance less of a headache for businesses. For policymakers, the challenge is to balance affordability and simplicity with revenue neutrality.

(with inputs from agencies)