GST 2.0: Two Slabs, Rate Cuts for Key Consumer Items, life & health insurance premium at 0%

India's Goods and Services Tax (GST) regime underwent a sweeping overhaul on Thursday as the GST Council approved a simplified two-slab structure, eliminating the 12% and 28% brackets in a bid to reduce the tax burden on everyday goods and services while introducing a punitive 40% rate for sin and luxury items. The changes, effective September 22, are projected to lower prices on a wide array of consumer products, fulfilling Prime Minister Narendra Modi's promise of a "Diwali gift" to the middle class and small businesses, though they come with an anticipated revenue hit of up to 40,000 crore rupees ($475 million) in the short term.

The 56th GST Council meeting, chaired by Finance Minister Nirmala Sitharaman and attended by state finance ministers, endorsed the Centre's proposal for "GST 2.0" reforms, which aim to streamline compliance, correct inverted duty structures, and enhance ease of doing business. Under the new framework, 99% of items previously taxed at 12% will shift to the 5% slab, while 90% of those in the 28% category will move to 18%. Essentials and merit goods remain at 0% or 5%, and a new 40% slab targets demerit goods like tobacco and online gaming to discourage consumption and maintain revenue neutrality over time.

"This rationalisation will make goods more affordable, boost manufacturing competitiveness, and widen the tax base through increased consumption," Sitharaman said in a post-meeting press conference. The reforms, first hinted at in Modi's Independence Day address on August 15, address long-standing industry demands for fewer slabs to reduce classification disputes and working capital blockages. However, opposition-ruled states like Kerala and Tamil Nadu pushed for revenue compensation guarantees, citing potential shortfalls for state budgets.

The move is expected to free up liquidity for micro, small, and medium enterprises (MSMEs) by fixing inverted tax anomalies in sectors like textiles, footwear, and electronics, where input taxes exceed output taxes. Analysts estimate a 5-10% price drop on daily essentials, potentially spurring demand in consumer durables and packaged foods amid slowing economic growth. Compensation cess on items like aerated drinks will be phased out by March 2026, replaced by targeted levies on health and clean energy to support fiscal sustainability.

Individual health and life insurance premiums will now attract 0% GST, down from 18%, providing relief to millions of policyholders. Hotel accommodations exceeding 7,500 rupees per day will face 18% GST based on actual transaction value, scrapping the "declared tariff" concept to curb evasion. Pre-filled returns and automated refunds will further ease compliance, with biometric authentication mandatory for new corporate registrations from April 2025.

40% Sin Tax

While the reforms signal a pro-consumer shift, challenges remain. The 40% slab applies to just 5-7 sin goods, including tobacco (total effective tax up to 88%) and gutka, but online gaming faces reclassification as a demerit activity. Precious metals like gold retain their 3% rate, and petroleum products stay outside GST for now. States have until June 30, 2025, to review compensation cess extensions.

These adjustments are anticipated to stimulate economic activity, with the government projecting higher collections from expanded formalization and reduced evasion. Notifications will follow within days, and businesses are advised to update systems for seamless transition. The reforms underscore India's push toward a $10 trillion economy by 2047, balancing growth with fiscal prudence.