GST Council’s Two-Rate Structure Reform
Background
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GST (Goods & Services Tax) launched on 1 July 2017 with multiple slabs: 0%, 5%, 12%, 18%, 28% + cess.
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Complex structure → frequent rate changes, inverted duty issues, compliance burden.
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The idea of rate rationalisation and simplification was recommended by several expert groups, including:
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15th Finance Commission Report.
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GST Council Fitment Committees.
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Economic Survey suggestions.
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The 56th GST Council meeting (Sept 2025) took a major reform step by approving a two-rate GST structure.
Provisions of New Structure
1. Slabs
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5% (reduced/essential rate) → Food items, FMCG, agriculture inputs, textiles, cement (moved down), daily-use household items.
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18% (standard rate) → Majority of goods & services.
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40% (special rate) → Sin & super-luxury goods.
2. Zero-Rated Items (0%)
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Food: Roti, chapati, paratha, paneer, UHT milk.
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Healthcare:
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33 life-saving medicines.
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Individual life insurance policies (earlier 18%).
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Individual health insurance policies (earlier 18%).
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Spectacles (28% → 5%).
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3. Items with Significant Reductions
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Cement: 28% → 18% (huge infra push).
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Daily-use FMCG: soaps, shampoos, toothpaste, toothbrush, hair oil, bicycles → 5%.
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Packaged foods: namkeens, sauces, pasta, noodles, chocolates, coffee, butter → 5%.
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Labour-intensive industries: handicrafts, granite, leather goods → 5%.
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Agriculture inputs: 12 bio-pesticides, bio-menthol → 5%.
4. Sector-Specific Corrections
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Textiles:
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Man-made fibre → 18% → 5%.
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Man-made yarn → 12% → 5%.
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Rectifies inverted duty structure.
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Fertilizers:
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Sulphuric acid, nitric acid, ammonia → 18% → 5%.
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Reduces costs for farmers.
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5. Special 40% Slab
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Sin goods: pan masala, gutka, cigarettes, bidi, chewable/unmanufactured tobacco.
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Super-luxury goods:
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Aerated water, caffeinated beverages.
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Cars >350cc, high-end motorcycles.
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Yachts, helicopters, private jets.
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🔹 Note: Until state compensation loans are cleared, tobacco remains under 28% + cess system.
Fiscal Aspects
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Revenue implication (2023–24 base year): estimated ₹48,000 crore loss.
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Govt’s stance:
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Buoyancy effect (higher consumption due to cheaper goods).
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Better compliance (simplified structure reduces evasion).
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States’ concern: potential loss of GST revenue unless Centre provides a cushion.
Significance
1. For Consumers
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Daily essentials cheaper → inflation moderation.
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Life-saving medicines & insurance zero-rated → boosts affordability.
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Lower cost of housing & infrastructure due to cement reduction.
2. For Industries
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Textiles: removes duty inversion → global competitiveness.
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Fertilizers: cheaper inputs → supports agriculture.
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Construction: cement cut helps real estate, infra, housing.
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MSMEs & handicrafts: lower rates → labour-intensive job creation.
3. For Economy
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Simplicity: only two main slabs vs earlier 5+ slabs.
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Equity: essentials low/zero tax, luxuries taxed heavily.
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Growth push: cheaper inputs → higher investment in infra, manufacturing.
Issues & Challenges
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Revenue Concerns:
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Short-term loss of ~₹48,000 crore.
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States may face fiscal stress if buoyancy fails.
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Implementation challenge:
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Transition for businesses (re-pricing, IT systems).
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Tobacco items dual regime (28%+cess till loans cleared).
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Policy contradiction: While moving towards “two-rate simplicity”, introduction of 40% slab creates a third tier.
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Luxury tax debate: High tax may discourage consumption but encourage smuggling/black market in sin goods.
GST Rate Rationalisation – Before vs After (Effective 22 Sept 2025)
| Category / Item | Old Rate | New Rate | Remarks / Impact |
|---|---|---|---|
| Daily-use FMCG | |||
| Hair oil, soap, shampoo, toothpaste, toothbrush | 12% / 18% | 5% | Common household goods cheaper |
| Tableware, kitchenware, bicycles | 12% / 18% | 5% | Middle-class relief |
| Food Items | |||
| All Indian breads (roti, chapati, paratha), paneer, UHT milk | 5% | 0% | Essential food made tax-free |
| Namkeens, sauces, pasta, instant noodles, chocolates, coffee, butter | 12% / 18% | 5% | Lower cost of processed food |
| Health & Insurance | |||
| Life & health insurance policies (individual) | 18% | 0% | Major relief for middle-class, health sector |
| Life-saving drugs (33) | 12% | 0% | Cheaper treatment, healthcare boost |
| Spectacles (vision correction) | 28% | 5% | Affordable healthcare support |
| Construction & Industry | |||
| Cement | 28% | 18% | Boost to infra & housing |
| Handicrafts, marble/granite blocks, leather goods | 12% | 5% | Support to labour-intensive industries |
| Bio-pesticides, bio-menthol | 12% | 5% | Agriculture-friendly |
| Manmade fibre | 18% | 5% | Duty inversion corrected |
| Manmade yarn | 12% | 5% | Boost to textile sector |
| Fertilizer inputs (sulphuric acid, nitric acid, ammonia) | 18% | 5% | Support for farmers |
| Automobile & Energy | |||
| Electric vehicles | 5% | 5% | Retained (green push) |
| Motorcycles >350cc, large cars, private helicopters/jets, yachts | 28% + cess | 40% (Special) | Luxury & sin tax |
| Tobacco Products | |||
| Pan masala, gutka, cigarettes, bidi, chewable & unmanufactured tobacco | 28% + cess | 40% (Special, after loans repaid) | Strong sin-tax move |
| Beverages | |||
| Aerated water, caffeinated beverages | 28% + cess | 40% (Special) | To discourage consumption |
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