India’s Goods and Services Tax sees its biggest overhaul in nearly a decade. With new slabs, reclassified goods and luxury taxes, the reform aims to boost consumption, ease inflation, and balance growth with fiscal responsibility. But will the government’s gamble pay off? A report by Priyanka Tanwer
India’s tax landscape is set for its most dramatic reshaping in nearly a decade. Effective 22 September, 2025, the Goods and Services Tax (GST) will undergo a sweeping overhaul that changes how consumers spend, how companies price their products, and how the government balances growth with fiscal responsibility.
Approved at the GST Council’s meeting on 3 September 2025, the reform simplifies the old system of four major tax slabs — 5%, 12%, 18% and 28% — into two broad rates of 5% and 18%, while creating a new 40% slab for luxury and “sin” goods. Nearly 440 items have been reclassified, ranging from soaps and shampoos to cars, televisions, hotel tariffs, and premium apparel.
The government has pitched the change as a pro-consumer, pro-growth measure designed to cut inflation, spur spending, and simplify compliance. But like all major policy shifts, it comes with trade-offs — from potential revenue losses to transitional challenges for businesses and state governments.
Why now? The political and economic timing
The timing of the GST revamp is deliberate. It arrives just ahead of India’s festive season — a crucial period for retail sales, automobile purchases, and consumer goods demand. With the festive quarter often accounting for up to 40% of annual sales for some sectors, the government hopes that lower taxes will amplify demand.
There is also an inflation angle. India has struggled with sticky prices in food and household items. By cutting GST on essentials, policymakers aim to shave off 50 to 90 basis points (0.5–0.9%) from headline inflation, providing breathing space for both households and the Reserve Bank of India (RBI).
Externally, India faces new US tariffs on certain exports, raising concerns about slower trade-driven growth. The GST cut is thus intended as a buffer — stimulating domestic consumption to offset global headwinds.
Speaking to Tehelka, Navy Vijay Ramavat, MD, Indira Group said that the government decision was more about global geopolitical pressures than domestic politics, though it naturally comes with a collateral political advantage.
“GST reforms had been in discussion for a while, but the recent US tariffs became the real trigger. The government made this move primarily to deal with tariff shocks which is kind of “Aapda mein Avsar” and as a result, it will also give a lift to consumption, the basic wheel of any economy,” he said.
“It’s a timely reform, shaped by global circumstances but one that ends up strengthening domestic demand too,” he further added.
| WHAT GETS CHEAPER, WHAT GETS COSTLIER |
| · The biggest winners of the new GST regime are everyday essentials. Products such as packaged foods, dairy items, toiletries, and household cleaning goods are moving to the 5% slab. Many small cars, electric vehicles, and mass-market two-wheelers will also enjoy lower rates. |
| · Household appliances are another category to see relief. Televisions, dishwashers, refrigerators, and air-conditioners are expected to become 8–9% cheaper. |
| · Luxury comes at a price. Premium fashion above Rs 2,500, high-end cars, five-star hotel tariffs, cigarettes, tobacco products, and imported liquor will fall under the steep 40% slab. |
Counting the cost: Revenue and deficit pressures
The cheer for consumers comes with a cost for the exchequer. Official estimates suggest that the GST changes could reduce government revenues by Rs 48,000 crore in the current fiscal year.
While the government argues that higher consumption and better compliance will partly make up for the shortfall. States, which share GST revenues with the Centre, are especially concerned about compensation for lost collections.
Premchand Chandrasekharan, Partner, Avalon Consulting, said that GST reforms are expected to have a definite positive impact on the Indian economy.
“The rationalization of indirect taxes is expected to reduce the cost of manufacturing goods in India, and to some extent, this competitiveness can be expected to help exporters mitigate the impact of global tariff barriers,” Premchand told Tehelka.
He said that GST reforms could be seen as primarily a way to provide an alternative growth path to the Indian economy, which could be potentially impacted by reduced export demand.
Rate cuts could provide a boost in consumption in price-elastic sectors. The intended benefits can be secured if mechanisms to increase compliance, including digital invoicing, AI-enabled audit, and digital data validation, can expand the tax base and improve collections. As a secondary benefit, being attentive to citizen concerns related to the cost of living can help improve optics.
“Lower indirect taxes also can be seen as progressive since they lower the tax burden on lower income categories, who are likely to spend the extra disposable income on buying more goods. We can also expect second-order impacts in terms of attracting fresh investments to augment domestic capacity. Lower indirect taxes will also be an incentive for any new foreign investor considering India as a manufacturing destination,” he added.
Meanwhile industry associations have largely welcomed the reform, though with caveats.
FMCG companies expect higher sales volumes as consumer demand picks up.
Automobile manufacturers have hailed the lower rates on small cars and EVs. The Society of Indian Automobile Manufacturers (SIAM) has welcomed the move and said that this step will encourage first time buyers and middle income families.
SIAM chairman stated, “We are confident that the government will soon notify a suitable mechanism for utilization of compensation cess on unsold vehicles.”
Santosh Iyer, Managing Director & CEO, Mercedes-Benz India, said that we are thankful to the government for keeping GST rate for BEVs unchanged, ensuring faster transition to a decarbonized future.
“Government listened to the automotive industry’s long standing wish list of rationalizing GST rates. This GST revision is the step in the right direction, is progressive and will induce the much-needed impetus by boosting consumption and bring momentum to the automotive industry which essentially remains the pulse of the Indian economy,” Iyer added.
Hospitality groups welcomed cuts on mid-tier hotel tariffs but warned that the 40% slab on premium stays could dent India’s luxury travel market.
For households, the new GST regime is both a relief and a mixed bag. Middle- and lower-income families, who spend a larger share of their budgets on essentials, stand to gain the most. Everyday shopping baskets — from bread and milk to soap and toothpaste — will shrink in cost.
At the same time, aspirational spending may be squeezed. For families saving up for a luxury holiday, a designer outfit, or a high-end car, the higher GST rates will feel like a pinch.
Economists note that this balancing act — easing costs for the many while taxing the few — is politically astute, but its economic impact will depend on how consumption patterns shift.
The impact will be closely watched on several fronts
· Economists forecast an additional 0.2–0.3% boost to GDP in FY 2025–26 from higher consumer spending.
· Monetary policy: Softer inflation may give the RBI space to maintain supportive interest rates, aiding growth.
· Fiscal balance: Revenue losses could push the fiscal deficit above target, unless offset by higher growth or spending cuts.
| WINNERS | LOSERS |
| · Consumers of essentials and mass-market goods | Luxury and premium brands |
| · FMCG and retail companies | Tobacco and liquor industries |
| · Automobile sector, especially small cars and EVs | High-end hospitality and fashion retailers |
| · Consumer durables and electronics, Mid-tier hospitality | State governments reliant on GST revenues |
What political parties have to say?
Former finance minister and Congress Rajya Sabha MP P Chidambaram said that the GST rationalization and the reduction in rates on a range of goods and services are welcome but eight years too late.
“The current design of GST and the rates prevailing until today ought not to have been introduced in the first place. We have been crying hoarse for the last eight years against the design and rates of GST, but our pleas fell on deaf ears,” he said.
He also raised a question and said, “It will be interesting to speculate on what drove the government to make the changes, Sluggish growth? Rising household debt? Falling household savings? Elections in Bihar? Mr Trump and his tariffs? All of the above?”
Meanwhile, Communist Party of India (Marxist)’s Central Committee member Thomas Isaac called the GST reforms a ‘big setback for fiscal federalism.’
The road ahead
Policy reforms are rarely judged in the first week of their rollout. Much will depend on:
· How businesses adjust prices — will they pass on savings to consumers, or keep margins higher?
· How states are compensated — and whether fiscal tensions rise between Centre and states.
· How consumer sentiment responds — will households spend the extra savings, or save amid global uncertainties?
· How durable the benefits are — a festive-season surge is likely, but sustaining demand in 2026 will be the true test.
As India enters what some officials call the era of “GST 2.0,” the reform is both a gamble and an opportunity. If the bet on lower rates spurring higher consumption pays off, it could mark a new chapter in India’s growth story. If not, the government may find itself grappling with higher deficits and uneven sectoral outcomes.
The new GST rates represent more than just tax tinkering; they are a statement of intent. India is signaling that it values consumption-driven growth, inflation relief, and simplification over short-term revenue maximization.
The next few months — as new price tags roll out, festive sales data comes in, and inflation figures are released — will reveal whether this gamble pays off. For now, what is certain is that 22 September 2025 will mark a turning point in India’s journey with GST, shaping the economy, politics, and daily lives of citizens in ways both big and small.
