GST Meeting Begins: Big Slash on Everyday Goods Tax

GST Meeting Begins: Big Slash on Everyday Goods Tax

The 56th Goods and Services Tax (GST) Council meeting, held on September 3–4, 2025, in New Delhi, has been touted as one of the most significant tax overhauls since the GST's inception in 2017. Chaired by Union Finance Minister Nirmala Sitharaman, the two-day meeting brought together finance ministers and officials from all states and Union Territories to deliberate on what many are calling "GST 2.0." The primary agenda was to rationalise the existing multi-tier tax structure, simplify compliance, and most importantly, reduce the tax burden on everyday consumer goods, with a key focus on moving to a simpler two-rate structure of 5% and 18%.

The potential for a major tax reform, hinted at by Prime Minister Narendra Modi in his Independence Day speech, has generated immense anticipation among consumers, businesses, and economists. The proposed changes aim to not only simplify the tax regime but also to stimulate consumption, boost economic growth, and provide tangible relief to the common person. However, the path to reform is not without its challenges, with concerns over potential revenue losses for states and the classification of goods under the new slabs.

The Genesis of GST 2.0: A Move Towards Simplification

The current GST regime, which replaced a complex web of central and state taxes, has a four-tier structure of 5%, 12%, 18%, and 28%, along with a special nil rate and a compensation cess on luxury and sin goods. While a significant reform in itself, this structure has been criticized for its complexity, leading to classification disputes and compliance issues. The vision for GST 2.0 is to simplify this framework into a more streamlined and efficient system.

The core of the "GST 2.0" proposal lies in the abolition of the 12% and 28% tax slabs. According to the blueprint discussed in the meeting, most of the items currently in the 12% slab would be moved to the lower 5% slab, while a majority of items in the 28% slab would be brought down to the 18% slab. A higher tax rate, potentially 40%, is proposed for a select few luxury and demerit goods, such as tobacco and high-end automobiles. This move is designed to address the issues of an inverted duty structure, where inputs are taxed at a higher rate than outputs, and to provide much-needed relief to consumers.

The Consumer's Cheer: What Gets Cheaper?

The most immediate and tangible impact of the proposed tax cuts will be on the common consumer's wallet. The move to shift a large number of everyday goods to the 5% slab is expected to make a wide range of products more affordable.

• FMCG and Essentials: Products that are a staple in every Indian household are set to become cheaper. This includes items like shampoos, toothpaste, talcum powder, and soaps, which are currently taxed at 18%. The reduction to 5% will significantly lower their prices, a boon for consumers and a potential sales boost for major Fast-Moving Consumer Goods (FMCG) companies like Hindustan Unilever, Godrej Consumer Products, and Nestle India. Packaged food items like cooking oils, milk powder, nuts, and namkeen, currently taxed at 12%, are also expected to move to the 5% slab.
• Electronics and Consumer Durables: The 28% slab, often referred to as the "luxury" slab, has been a major concern for the consumer durables sector. The proposed reduction of GST on items like air conditioners, large televisions, and washing machines to 18% will make these appliances more accessible, especially during the festive season. This move is expected to revive demand in a sector that has faced sluggish growth in recent times.
• Automobiles: The auto industry, a significant contributor to the Indian economy, is also a major beneficiary. The proposal suggests a tiered approach, where entry-level small cars and two-wheelers could see their GST rates drop from 28% to 18%. This is a long-standing demand from the industry, represented by bodies like the Automotive Tyre Manufacturers Association (ATMA), which has argued that tyres, for instance, should not be classified as luxury goods. A rate cut on these vehicles could stimulate demand and support a sector that employs millions.

The Business Perspective: Simplifying Compliance and Boosting Growth

For businesses, especially Micro, Small, and Medium Enterprises (MSMEs), the proposed reforms hold the promise of simplifying a tax system that has often been a source of confusion and litigation. The move to fewer tax slabs will reduce the complexity of classification, making it easier for businesses to determine the correct tax rate for their products. This will not only reduce the risk of disputes with tax authorities but also improve the overall ease of doing business.

• Addressing Inverted Duty Structure: The rationalisation of tax rates is expected to fix the issue of an inverted duty structure. By ensuring that input tax rates are not higher than output tax rates, the reforms will free up working capital for manufacturers and exporters, thereby improving their competitiveness and supporting the government's "Make in India" initiative.
• Improved Compliance: A simplified tax structure with fewer slabs is likely to lead to better tax compliance. Businesses, particularly those currently operating outside the formal GST system, may find it more attractive to join the tax net, thereby broadening the tax base and increasing government revenue in the long run.
• Sectoral Impact: The reforms are expected to have a cascading positive effect across various sectors. The reduction in tax on cement, from 28% to 18%, will benefit the construction and infrastructure sectors. The lower rates on textiles, fertilizers, and medical devices will also have a significant positive impact on their respective industries.

The Challenges: A High-Stakes Bet and State Concerns

While the proposed GST overhaul has been met with widespread optimism, it is not without its challenges. The biggest hurdle lies in addressing the concerns of states, particularly those governed by opposition parties, regarding potential revenue losses.

• Revenue Neutrality: The GST Council is a unique federal body where decisions are made by consensus, with the Centre holding one-third of the voting power and states holding two-thirds. A key point of contention is how to ensure revenue neutrality for states after the tax rationalisation. States like Karnataka, Kerala, West Bengal, and Tamil Nadu have voiced concerns that the proposed cuts could lead to significant annual revenue shortfalls.
• Compensation Cess: When GST was first implemented, a compensation cess was levied on certain goods to compensate states for any revenue loss for a period of five years. This compensation mechanism expired in June 2022, leaving states more vulnerable to revenue volatility. While a surplus in the cess fund is being considered to compensate states, the long-term sustainability of this model remains a key point of discussion.
• The 40% Slab: The proposal to introduce a 40% tax slab for sin and uber-luxury goods is seen as a way to offset potential revenue losses from the lower slabs. However, there are different views on this. Some, like the Think Change Forum, have argued against a higher slab, stating that it could set a precedent for further expansion and undermine the goal of simplification. States, on the other hand, have demanded that any additional levy on these items be devolved entirely to them to make up for their losses.

A Landmark Decision in the Making

The 56th GST Council meeting is a watershed moment for India's indirect tax system. The discussions, led by Finance Minister Nirmala Sitharaman, are not just about numbers and percentages; they are about shaping the future of India's consumption-led economy. By addressing the complexities of the current GST structure and providing relief to the common man, the government is making a high-stakes bet on the Indian consumer.

The outcome of this meeting, which is expected to be unveiled by Diwali, will have far-reaching implications. It will determine whether the dream of a simplified "one nation, one tax" system can be fully realised. If the GST Council can successfully navigate the political and economic complexities, the "GST 2.0" reforms could usher in a new era of affordability, growth, and ease of doing business for all of India