In one of the most sweeping tax reforms since its introduction in 2017, India’s Goods and Services Tax (GST) Council has approved a major overhaul of the indirect tax system, reducing the current four-tier structure to a simplified two-tier regime. The changes will come into effect on September 22, 2025.
Key Features of the New GST Structure
- 5% slab: Applied to essential goods and services, including everyday food items.
- 18% slab: Applied to most goods and services in the general category.
- 40% rate: Introduced for luxury and “sin” goods such as high-end cars, tobacco, yachts, and large motorcycles.
- Exemptions: Life and health insurance, along with some essential items like UHT milk, paneer, and roti, have been moved to the zero-tax category.
- Green push: Electric vehicles remain in the 5% slab, supporting India’s clean mobility ambitions.
Economic Implications
The Finance Ministry estimates a revenue impact of ₹48,000 crore (USD 5.5 billion), significantly lower than initial projections. The reform is expected to reduce inflation by 1.1 percentage points, providing relief to households and stimulating consumption during the upcoming festive season.
Market Reaction
Indian equity markets welcomed the announcement. The Nifty 50 gained 0.5% in early trading, led by sharp rallies in consumer and auto stocks. Shares of Britannia, Nestlé, and Mahindra & Mahindra surged up to 6% on expectations of stronger consumer demand and lower tax burdens.
| Category / Sector | New GST Rate | Impact |
|---|---|---|
| Everyday essentials (milk, paneer, roti, erasers) | 0% | Cheaper for households; relief on daily expenses |
| Life & health insurance | Exempt | Boosts affordability, likely to increase insurance penetration |
| Electric vehicles (EVs) | 5% | Maintains low tax; strengthens India’s clean mobility push |
| Consumer goods (FMCG) | 5% / 18% | Lower burden on packaged foods & essentials; demand set to rise |
| Automobiles (mid-range) | 18% | Reduced from higher brackets; expected to drive sales during festive season |
| Luxury cars, motorbikes >350cc | 40% | Becomes significantly more expensive; demand may soften |
| Tobacco, liquor, yachts, and aircraft | 40% | Higher cost; discourages consumption of sin goods |
| Hospitality & dining (mid-segment) | 18% | Rationalized; likely to support steady growth |
| Luxury hospitality & leisure | 40% | Costs rise; impact on premium consumption segment |
Broader Significance
The move is expected to ease compliance for businesses, improve working capital cycles, and strengthen India’s positioning as a fast-growing consumer-driven economy. For international investors, the simplified tax system signals a stronger push toward stability, transparency, and efficiency in Asia’s third-largest economy.
