GST 2.0: two main rates from 22 September 2025

The Goods and Services Tax, introduced in July 2017, replaced a maze of central and state indirect taxes with a single national tax, administered through the GST Council, in which the Centre and the states sit together. For eight years, GST operated with four main slabs: 5, 12, 18, and 28 per cent, plus compensation cess on certain goods. The multiplicity of slabs was a frequent complaint from businesses, which argued that classification disputes and inverted duty structures, where inputs are taxed higher than outputs, added cost and litigation.

On 3 September 2025, the GST Council, at its 56th meeting chaired by Finance Minister Nirmala Sitharaman, approved a major rationalisation, widely called GST 2.0. From 22 September 2025, most goods and services were taxed at two main rates, 5 per cent, called the merit rate, and 18 per cent, called the standard rate, with a 40 per cent demerit rate for a short list of luxury and sin goods. The 12 and 28 per cent slabs ceased to exist as general categories, and a number of staples, including ultra-high temperature milk, paneer, and certain breads, became exempt.

The changes also affected services and insurance. Life and health insurance premiums, previously taxed at 18 per cent, became exempt from GST, and a range of services, including gyms, salons, and yoga services, moved from 18 per cent to 5 per cent. Packaged foods, soaps, shampoos, toothpaste, bicycles, and many household goods moved to 5 per cent. Tobacco products were treated separately, with their rate changes deferred, reflecting the revenue and public health considerations that apply to that sector.

The government presented the reform as a next-generation GST reform aimed at simplifying compliance, reducing classification disputes, and passing on benefits to consumers, especially for essentials and health-related spending. Businesses welcomed the simpler structure but noted that the transition required repricing, updating software, and managing input tax credit, particularly where an output rate fell below the input rate. States, which share GST revenue, watched collections closely, since a rate cut that boosts consumption may or may not compensate for the lower rate on each sale.

GST 2.0 is therefore not just a tax cut. It is a redesign of the rate structure that will be judged over several quarters, by whether it simplifies compliance, whether price reductions reach consumers, and whether revenue remains stable enough to fund state and central spending.