GST 2.0: India unveils sweeping tax reforms to boost growth and ease living costs

In a historic move poised to reshape the economic landscape, India’s Goods and Services Tax (GST) Council has approved sweeping reforms designed to simplify the tax regime and stimulate growth. Effective from September 22, 2025, these changes termed “GST 2.0” introduce a streamlined two-slab tax system, replacing the previous four-tier structure introduced in 2017.

Under the new system, most goods and services will fall into two categories i.e. a 5% rate for essentials and an 18% standard rate. A third, 40% “sin and luxury” rate will apply to select items such as cigarettes, large-engine vehicles, and high-end luxury products like yachts and helicopters. This overhaul aims to make taxation more transparent and affordable for businesses and consumers alike.

Relief for Rural and Agricultural Sectors

One of the most notable changes is the reduction of GST from 12% to 5% on crucial rural and agricultural items, including tractors, farm machinery, handicrafts, and marble. The move is set to make these products far more accessible to farmers, artisans, and rural communities, thereby boosting agricultural productivity and rural development. Lower taxes on essential tools and materials will help grassroots industries manage costs and promote employment in villages. The reduction on marble is also expected to aid the construction of affordable homes and rural infrastructure, advancing the government’s vision of inclusive growth.

Affordable Daily Essentials and Consumer Goods

Daily-use consumer goods within the fast-moving consumer goods (FMCG) sector, previously taxed at 18%, will now attract just 5% GST. This includes a range of items including basic personal care products, small kitchen appliances translating to immediate savings for millions of Indian families.

The footwear industry has also seen relief, with shoes priced at or below INR 2,500 per pair now taxed at just 5%, alongside apparel and accessories within the same price bracket. This is expected to stimulate domestic manufacturing, boost consumer demand, and enhance the sector’s competitiveness. Additionally, the government has also addressed long-standing concerns over inverted duty structures in key sectors such as textiles and fertilizers, bringing much-needed clarity and stability.

Further, significant tax reductions have been extended to products like air conditioners, all categories of televisions, and small cars, which will now fall under the 18% GST bracket, a notable drop from the earlier 28%. The hospitality industry, too, stands to gain, with mid-range hotel services now taxed at a lower 5%, making travel and leisure more accessible for Indian households.

GST Exemptions for Health and Insurance

Perhaps the most impactful reform is the full exemption of GST on 33 lifesaving medicines and all individual life and health insurance policies. By removing taxes from these critical healthcare products and financial services, the new regime aims to reduce out-of-pocket expenses for families and make essential medical treatment and protection more accessible. The government anticipates that this change will encourage greater adoption of health insurance, provide relief to patients battling serious illnesses, and contribute to the nation’s overall well-being.

The timing of these changes is particularly significant as Indian exporters face increased tariffs in the US market. By reducing domestic prices and boosting homegrown demand, the new GST structure is designed to cushion the impact of global trade disruptions. Small and medium enterprises (MSMEs), in particular, will benefit from simplified compliance, reduced working capital requirements, and greater freedom to redirect efforts toward the domestic market.

Fewer tax slabs will streamline compliance processes, minimize disputes over product classification, and shorten the cycle from invoicing to tax filing. This is expected to unlock working capital, helping MSMEs and other businesses ramp up promotions, especially ahead of the festive season.

For businesses, immediate alignment with the new regime is crucial. Enterprises will need to update systems, reprice products, and ensure the benefits of rate reductions are passed on to consumers.

With these sweeping changes, the government aims to broaden the tax base, improve compliance, and spur consumption-led growth. GST 2.0 lays a clear foundation for future reforms, offering a simpler, more transparent tax framework that meets the evolving needs of India’s dynamic economy. As this new era begins, both households and businesses can expect to see lower prices and enhanced economic momentum in the years ahead.

(Views are personal; the author is Tax Partner at EY India)