By Krishna Dua 
The Genesis of GST 2.0: A Response to Economic Realities
The original GST framework, rolled out in 2017, was designed to create a unified national market by subsuming a complex web of central and state indirect taxes. While it has been largely successful, the multi-tier structure has often been criticized for its complexity, leading to classification disputes and compliance burdens for businesses. Moreover, the high tax rates on a wide range of goods, from consumer durables to essential household items, have been a source of consumer discontent.
The idea of a major GST overhaul gained momentum after Prime Minister Narendra Modi’s Independence Day address on August 15, 2025, where he hinted at significant tax reforms to make daily-use items more affordable. This promise was a direct response to a period of muted consumption and persistent inflationary pressures. The government’s new plan is built on three core pillars: structural reforms, rate rationalization, and easing the burden of compliance for businesses, especially Micro, Small, and Medium Enterprises (MSMEs).
The New Tax Slabs: Who Benefits?
The most striking feature of GST 2.0 is the simplification of the tax structure. The government has proposed to abolish the 12% and 28% slabs and move most of the items under these brackets to a lower tax rate. The new GST regime will predominantly operate with just two main slabs:
The 5% Slab: A Boon for Daily Essentials
Under the new plan, the 5% slab will become the primary category for a vast range of essential goods. This is a significant move, as nearly 99% of the items currently taxed at 12% are expected to be shifted to this lower bracket. The reduction is set to provide a visible and immediate price relief for the common man.
The list of goods moving to the 5% slab is extensive and includes:
- Food and Beverage: Packaged items like ghee, nuts, packaged drinking water (in 20-litre cans), and a variety of namkeen and snack foods. A range of processed foods and non-aerated beverages are also expected to become cheaper.
- Household Items: Common household products such as pencils, bicycles, umbrellas, and hairpins are likely to see their prices fall.
- Health and Wellness: Life-saving medicines and a range of medical devices, currently in the 12% slab, will be re-categorized to 5%, making healthcare more affordable.
- Other Goods: Apparel and footwear priced below ₹1,000, along with various other everyday items, will also benefit from the tax cut.
The re-allocation of these items to the 5% slab is expected to boost consumption, particularly among middle and lower-income households, whose budgets are highly sensitive to price changes.
The 18% Slab: Making Aspirational Goods Affordable
The 28% slab, which currently taxes a variety of luxury and “sin” goods, is also set to be dismantled for most items. The GST Council has proposed that a majority of the goods under the 28% bracket will be moved to the 18% slab. This will have a transformative impact on the prices of a number of high-value consumer goods.
Items that are expected to become more affordable as a result of this change include:
- Consumer Electronics: Televisions, air conditioners, washing machines, and refrigerators, which were previously taxed at 28%, are likely to fall into the 18% slab. This is a crucial move to boost demand in the consumer durables sector, especially ahead of the festive season.
- Automobiles: The GST on small petrol hybrid cars, a long-standing demand of manufacturers like Toyota Motor and Maruti Suzuki, is set to be reduced from 28% to 18%. This will make these vehicles more affordable and encourage the adoption of cleaner technologies.
- Other Goods: Items like cement and certain types of capital goods, which are critical inputs for infrastructure and manufacturing, will also see their tax rates fall from 28% to 18%. This is expected to lower production costs and stimulate industrial growth.
The Elephant in the Room: The New 40% Slab
While the GST 2.0 reform is largely about tax cuts, it also includes a new, higher tax slab for a specific category of goods. The government has proposed the introduction of a special 40% slab for luxury and “sin” goods. This new tax rate, which will be in addition to a compensation cess, is a strategic move to address two key concerns: managing the consumption of demerit goods and offsetting the potential revenue loss from the rate cuts.
Goods expected to fall under this new 40% slab include:
- Luxury Vehicles: High-end automobiles, including SUVs and premium cars, are likely to attract the new, steeper tax rate.
- Sin Goods: Tobacco products, pan masala, and cigarettes will also be taxed at the highest rate, with the government aiming to discourage their consumption.
- Other Items: Certain luxury services, such as entry to casinos, may also be included in this high-tax bracket.
The move to a 40% slab is seen as a way to ensure that the tax burden is equitably distributed, with the highest taxes levied on non-essential and socially undesirable products.
Impact on Businesses and the Economy
The GST 2.0 reforms are expected to have a far-reaching impact on businesses and the broader economy. For companies, particularly in the Fast-Moving Consumer Goods (FMCG) sector, the simplification of the tax structure will lead to a significant reduction in compliance burdens. The elimination of the 12% and 28% slabs will also reduce classification disputes, making the tax regime more predictable and transparent.
For the economy, the primary goal of the reforms is to stimulate consumption-led growth. By making a wide range of goods more affordable, the government hopes to boost consumer spending, which in turn will spur production and create jobs. The rate cuts are also expected to have a positive impact on inflation, providing some relief to consumers who have been grappling with high prices.
However, the implementation of these changes is not without its challenges. Opposition-ruled states have raised concerns about the potential revenue loss from the sweeping tax cuts. They argue that the move could significantly dent state revenues and have demanded a clear compensation mechanism. Union Finance Minister Nirmala Sitharaman, who is chairing the crucial GST Council meeting, will have to navigate these concerns to ensure a smooth transition to the new tax regime.
The Road Ahead: From Proposal to Implementation
The GST Council, a joint forum of the central government and the states, is the final authority on all matters related to GST. The current meeting, which began on September 3, 2025, is expected to finalize the details of the GST 2.0 package. If approved, the reforms are expected to be rolled out by Diwali, giving a major boost to consumer spending during the festive season.
The success of GST 2.0 will depend not just on the rate cuts but also on how effectively the benefits are passed on to the consumer. The absence of an anti-profiteering watchdog means that the extent of the price reduction will largely depend on competitive market dynamics. Companies, including big players like Hindustan Unilever and Godrej Industries, as well as consumer electronics giants like Samsung and LG Electronics, will have to decide whether to pass on the full tax benefit to consumers or retain some of it to shore up their profit margins.
In conclusion, GST 2.0 is a bold and transformative step towards a simpler, more equitable, and more efficient tax system. By cutting taxes on essentials and aspirational goods, the government is betting on a consumption-led revival of the economy. The reforms, if implemented effectively, have the potential to boost economic growth, ease inflationary pressures, and provide significant relief to millions of Indian consumers