The new framework from September 22 — coinciding with the first day of Navratri — will replace the existing four-tier system with two primary rates of 5 and 18 per cent, along with a special 40 per cent slab for luxury and sin goods.
In what is being described as the most sweeping overhaul of India’s indirect tax regime since its launch in 2017, the Goods and Services Tax (GST) Council on Wednesday approved a simplified two-slab structure. The new framework, to be rolled out on September 22 — coinciding with the first day of Navratri — will replace the existing four-tier system with two primary rates of 5 and 18 per cent, along with a special 40 per cent slab for luxury and sin goods.
Announcing the decision, Finance Minister Nirmala Sitharaman called it a “next-generation reform” that would ease the burden on ordinary citizens and address long-pending anomalies. The structural changes will ease the lives of people, including farmers, and correct the inverted duty structure, she said.
The new structure seeks to simplify compliance, reduce tax burdens and encourage consumption. Officials estimate that the rate rationalisation alone could have revenue implications of over Rs 48,000 crore. Most items currently taxed at 12 per cent will now fall into the 5 per cent bracket, while nearly 90 per cent of goods in the 28 per cent category will move to 18 per cent. The remaining items in the highest slab — including tobacco, cigarettes, pan masala, luxury cars, high-end motorcycles, yachts and private aircraft — will shift to the newly created 40 per cent rate.
“For common man and middle class items, there is a complete reduction from 18 per cent and 12 per cent to 5 per cent. Items such as hair oil, toilet, soap bars, soap bars, shampoos, toothbrushes, toothpaste, bicycles, tableware, kitchenware and other household articles are now at 5 per cent,” FM Sitharaman said.
“UHT milk, paneer, all the Indian breads will see nil rate,” she added.
GST on small cars and motorcycles up to 350 cc has been cut from 28 to 18 per cent, while the same reduction will apply to buses, trucks and ambulances. Auto parts will now attract a uniform 18 per cent rate. On the other hand, mid-size and larger cars, high-capacity bikes, and private aircraft will remain in the costlier 40 per cent slab. Pan masala, gutkha, cigarettes, chewing tobacco, zarda, unmanufactured tobacco and bidi, that fall under the “sin tax” category, will remain under the existing GST plus compensation cess regime for now.
The reforms also aim to tackle inverted duty structures that have troubled industries for years. In the textile sector, GST on man-made fibre and yarn will drop to 5 per cent. Fertiliser manufacturers, too, will benefit, with sulfuric acid, nitric acid and ammonia shifting from 18 to 5 per cent.
Prime Minister Narendra Modi welcomed the decision, describing it as a “Diwali gift” that fulfils his Independence Day promise of ushering in next-generation GST reforms. In a post on X, he said the measures would “strengthen the economy and improve the lives of farmers, MSMEs, middle-class families, women and youth.”
The 56th meeting of the GST Council, chaired by Sitharaman, witnessed broad consensus, though several opposition-ruled states expressed concern over possible revenue shortfalls. Finance ministers from Himachal Pradesh, Jharkhand, Karnataka, Kerala, Punjab, Tamil Nadu, Telangana and West Bengal submitted a note urging the Centre to guarantee revenue protection. Andhra Pradesh, however, extended full support, calling the reforms “pro-people and pro-economy.” Sitharaman thanked chief ministers for backing the move, stressing that “all states stood together for the common man.”
Correcting structural issues
For years, businesses have complained about the inverted duty structure (where raw materials are taxed higher than finished goods), especially in textiles and fertilisers. This reform addresses those anomalies.
With inflation stabilising and growth momentum needing a push, lowering GST on essentials and automobiles is expected to spur demand.
The government is positioning this as part of its broader economic revival strategy.
The 56th GST Council meeting managed to secure broad agreement, even from opposition-ruled states, which has been difficult in the past.
