The GST, launched with much fanfare at midnight on July 1, 2017, is poised for its biggest revamp yet. Eight years after its rollout, the government is preparing a GST 2.0 by Diwali 2025, aiming to simplify India’s indirect tax structure and boost consumption. The plan—endorsed by a Group of Ministers—proposes collapsing the current four main slabs into just two standard rates of 5 per cent and 18 per cent, with a special 40 per cent levy on luxury and sin goods.
The Goods and Services Tax (GST) was touted to be one of the biggest reforms in the post-liberalization era. Despite a resounding success in terms of the tax collections, GST has received its share of brickbats and with a hindsight of the last eight years, the government is now considering sweeping reforms into this unified indirect tax system in India.
One of the biggest criticisms of this tax system was its complexity and four tax slab structure. At the core of the proposed reform is a simplified rate structure, consolidating the current four main slabs (5 per cent, 12 per cent, 18 per cent, and 28 per cent) into just two standard slabs of 5 per cent and 18 per cent, plus a special 40 per cent rate on luxury and sin goods.
Prime Minister Modi, during his Independence Day speech announced that the government would alter the GST structure by Diwali. The GST 2.0 as it is being referred to, has created a lot of positive buzz among the people. .
While we do not know the finer details of the proposed reform, media reports suggest that nearly 99 per cent of items currently in the 12 per cent slab will shift to 5 per cent, while about 90 per cent of goods in the 28 per cent range will move to 18 per cent. A Group of Ministers (GoM) has endorsed the proposal, paving the way for approval by the GST Council and implementation before Diwali.
Sectoral impacts
The auto industry is happy, so are the people in the likelihood of lower GST rate to 18 per cent from the current 28 per cent. The ex-showroom prices of ICE (internal combustion engine) vehicles are expected to come down. Reports suggest that the entry level cars may become cheaper by up to Rs 36,000 while two-wheelers by Rs 6,200.
GST on white goods is expected to be lowered to 18 per cent from the current 28 per cent. The cost of air-conditioners, refrigerators and other goods is set to fall. Essentials like processed foods, dairy, personal care items, apparel, and hotel services—currently taxed at 12 per cent—will see lower GST at 5 per cent, improving affordability and stimulating consumption.
The reform specifically targets GST relief for farm products, health-related goods, handicrafts, and insurance—bringing down tax burdens on these sectors as well, aiding accessibility and rural outreach.
Near term hit
There will be unintended consequences of the proposed reform in the near term. One such consequence will be that people could push their major purchases after Diwali and that could hit festive season sale for companies and lead to inventory.
Temporary pain is expected—in the auto, electronics, and FMCG spaces—as stock, pricing, and supply chains realign to the new tax regime.
While the festive season will begin from the onset of Ganesh Chaturthi and Onam, the government appears keen to bring it quickly to pass on the benefits to the people. The GST Council meeting is expected in the first week of September and there will also be a meeting of state and central government officials ahead of the GST council meeting.
Another hit could be to the exchequer. While we do not know the exact impact of it as of now, multiple estimates have been made suggesting a revenue loss to the tune of Rs 85,000 crore to Rs 1.8 lakh crore.
Media reports suggest that the GST reform is expected to shave off approximately USD 20 billion annually, translating to a revenue loss of Rs 1.8 lakh crore which is roughly 0.15 per cent of GDP for the central government and about 0.36 per cent of GDP for state governments.
But this loss is being seen as a onetime loss as the thought behind the proposed changes is to recover the losses through volumes. A lower rate could kick-start the virtuous cycle. It will not only increase system volatility, the move is anti-inflationary and boost consumption.
Lower GST rates could exert downward pressure on inflation, potentially giving the RBI ammunition to consider rate cuts if required.
It will also be seen how Centre and states negotiate on the losses and who takes a higher share of losses. State governments, heavily reliant on GST revenue, are apprehensive as per reports. They are demanding compensation mechanisms, especially since previous assurances (post-2017 rollout) have remained unlegislated.
Offsetting losses
A consumption boost may get triggered in the medium term resulting in higher buoyancy to the tune of Rs 2 lakh crore increase. This could off-set part of the fiscal loss and eventually lead to a 0.6% rise in GDP growth.
A relief ahead of the festive season could not have a better timing. It was required not just for the common man but for the businesses as well. It is a strong messaging from the government and a big departure on how the indirect tax regime is seen in the eyes of the people. With four tax slabs and a complicated structure, it was always seen as a mechanism to serve the government and raise its tax collections.
As it unfolds, there are high expectations from the business community as well. A leaner and much simpler structure is expected this time around.
A pared-down tax structure will ease compliance, reduce classification disputes, and simplify administration for businesses, especially for MSMEs. Litigations against the government will also significantly reduce.
Lower taxation will effectively enhance disposable income and potentially expand consumption-driven businesses.
In conclusion, it can be said that the proposed GST reform by Diwali is transformative — a rare pivot toward simplicity, affordability, and growth. By collapsing rate structures and easing tax burdens on mass sectors, the move seeks to stimulate consumption and drive economic expansion. Yet, it comes with real fiscal costs—straining central and state budgets unless offset by consumption-led buoyancy and improved tax compliance. Citizens stand to gain, the economy could revive, but coordination with states and careful policy calibration will determine if this becomes transformative.
Following it, the Reserve Bank of India (RBI) slashed repo rate by 75 bps in two successive policies.
The combined impact of all these benefits is expected to serve people well and could fasten the growth engine.