GST Overhaul: A Comprehensive Guide to India’s New Two-Slab Tax System
Effective September 22, 2025, India’s GST system will undergo its most significant reform to date, moving from a four-tier structure to a simplified two-slab model. This major overhaul, a result of the **56th GST Council meeting**, aims to rationalize indirect taxes, make daily essentials more affordable, and stimulate a new wave of consumption-led economic growth. This article provides a detailed breakdown of the changes, their benefits, and answers key questions about the transition.
The New GST Structure: A Paradigm Shift
The existing four-tier GST regime (5%, 12%, 18%, and 28%) is being replaced with a streamlined two-tier system:
- The 5% Slab: This is the new rate for most essential and common-use goods and services, including many items previously in the 12% and 18% brackets.
- The 18% Slab: This will be the standard rate, applicable to a majority of other goods and services.
- The 40% “Special” Slab: A new, higher rate has been introduced for luxury and sin goods. This rate simplifies the tax structure by subsuming the existing GST and Compensation Cess into a single, higher levy.
These changes will be implemented nationwide from September 22, 2025, coinciding with the start of the festive season.
How the New Rates Benefit the Economy
The rationalization of tax slabs is expected to have a profound positive impact on the Indian economy.
- A “GST Diwali Bonanza” for Consumers: The most direct benefit is the reduction in prices for a vast array of goods. Items like shampoos, soaps, and consumer durables will become significantly cheaper, increasing household disposable income and boosting consumer confidence.
- Stimulus for Key Industries: Sectors like **Fast-Moving Consumer Goods (FMCG)** and **automobiles** are expected to see a major increase in sales volumes due to lower prices. This will drive production and create jobs, leading to a ripple effect across the economy.
- Simplification and Ease of Doing Business: For businesses, especially small and medium enterprises (SMEs), the reduction in the number of tax slabs will simplify compliance, reduce classification disputes, and make the tax environment more predictable. This will cut down on litigation and administrative burdens.
- Correcting Inverted Duty Structure: The reform corrects the inverted duty structure in many sectors, such as solar equipment and textiles, where the tax on inputs was higher than on the finished products. This will help domestic manufacturers by allowing them to utilize their Input Tax Credit (ITC) more efficiently, boosting the “Make in India” initiative.
- Health and Wellness Access: With a complete GST exemption on individual life and health insurance policies and a reduction in tax on medicines and medical equipment, healthcare will become more accessible and affordable for millions of Indians.
The End of Compensation Cess and the New 40% Slab
The GST Compensation Cess was an additional levy introduced to compensate states for revenue loss for the first five years after GST’s implementation in 2017. While it was scheduled to end in June 2022, it was extended to repay back-to-back loans taken during the pandemic. With the new tax overhaul, the GST Council has decided to **abolish the Compensation Cess** on all goods, with its revenue-generating component being merged into a higher, simplified 40% GST slab.
This move simplifies the tax structure on de-merit and luxury goods like high-end cars and sugary drinks, which previously attracted both a high GST rate and an additional cess. The new 40% slab ensures that the tax burden on these items remains high, while also streamlining the tax collection process and eliminating the need for a separate cess. However, specific products like cigarettes, chewing tobacco, and bidis will continue to be subject to the existing GST and Compensation Cess until all related loan and interest liabilities are fully discharged.
Detailed List of Key Rate Changes
| Item/Service | Old Rate | New Rate |
|---|---|---|
| Food & Dairy Products | ||
| UHT milk, Paneer, Indian breads (Chapati, Roti) | 5% | 0% |
| Butter, Ghee, Cheese, Packaged Namkeen, Chocolates, Pasta | 12%-18% | 5% |
| Packaged meat, fish products, dry fruits (Almonds, Cashews) | 12% | 5% |
| Personal Care & Household | ||
| Hair oil, Toothpaste, Shampoo, Toilet soap | 18% | 5% |
| Bicycles, Sewing Machines, Utensils, Clinical Diapers | 12% | 5% |
| Automobiles & Durables | ||
| Small cars (< 4m), Motorcycles (< 350cc) | 28% + 1%-3% Cess | 18% |
| ACs, TVs, Refrigerators, Washing Machines, Dishwashers | 28% | 18% |
| Healthcare & Insurance | ||
| General Medicines, Medical devices, Diagnostic kits | 12% | 5% |
| Life-saving drugs & some cancer/rare disease meds | 5% / 12% | 0% |
| Individual Health & Life Insurance Premiums | 18% | 0% |
| Services & Others | ||
| Beauty & wellness services, Hotel rooms < ₹7,500/night | 18%/12% | 5% (without ITC) |
| Luxury & Sin Goods | ||
| Luxury cars (>1500cc), Sugary drinks, Motorcycles (>350cc) | 28% + 15%-22% Cess | 40% |
| Cigarettes, Pan Masala, Chewing Tobacco | Existing GST + Cess | To be notified |
| Other Key Changes | ||
| Coal | 5% + ₹400/ton Cess | 18% |
| Tendu leaves | 18% | 5% |
| Renewable energy equipment/devices | 12% | 5% |
| Spectacles for correcting vision | 12% / 18% | 5% |
| Batteries (all types) | 18% / 28% | 18% |
| Wood pulp | 12% | 5% / 18% for dissolving grade |
For a complete list of changes, check the complete list here.
❓ Frequently Asked Questions (FAQs)
1. When do the new GST rates come into effect?
The new rates on goods and services, except for cigarettes, chewing tobacco products, and bidis, will be effective from **September 22, 2025**. The special rates for tobacco products will be implemented at a later date, to be notified after the government fully repays the loans taken to compensate states for revenue shortfalls. This delay ensures the stability of the compensation cess account.
2. Will goods already in stores become cheaper?
Yes. The government has clarified that retailers and companies must pass on the benefits of the GST rate reduction to consumers, even on pre-existing stock. Retailers are expected to issue revised invoices to reflect the lower tax. The government will be monitoring this to prevent any profiteering.
3. What about the change in rates on coal and tendu leaves?
The GST Council’s decisions are part of a broader rationalization exercise.
Coal: Previously, coal attracted a 5% GST plus a Compensation Cess of ₹400 per ton. To simplify the tax, the Council has recommended ending the Cess and merging the total tax burden into a single 18% GST rate. The overall tax incidence on coal remains similar, so there will be no additional burden on the consumer.
Tendu Leaves: The GST on tendu leaves has been reduced from 18% to 5% to align it with the GST on tobacco leaves, which are also taxed at 5%. This corrects a discrepancy and provides consistency in the tax structure for a minor forest produce.
4. Why have medicines not been fully exempted from GST?
All medicines are already prescribed a concessional GST rate of 5%, except for a few specified items that have a nil rate. A complete GST exemption on all medicines would break the **Input Tax Credit (ITC)** chain, making it difficult for manufacturers to claim tax credits on their inputs. This would lead to an increase in the cost of medicines for them, which might then be passed on to consumers in the form of higher prices. The current structure ensures affordability while maintaining a smooth tax flow.
5. Why is there a new 40% rate on some goods?
The 40% rate is a new **special rate** for a select list of goods, predominantly sin and luxury items. Most of these items previously attracted a high GST rate (28%) plus a substantial Compensation Cess. The GST Council has decided to end the Cess on most of these goods and instead merge the tax burden into a single, simplified rate. This simplifies the tax structure on these products and maintains a high tax incidence on items that are generally considered non-essential or harmful.
6. How does the rate change on spectacles and batteries affect consumers?
Spectacles: Spectacles and goggles used for correcting vision will now attract a lower GST of 5%, reduced from 12% and 18%. This will make eye care more affordable. However, other goggles, which are not for correcting vision, will continue to be taxed at 18%.
Batteries: To simplify the tax on batteries, all batteries under heading 8507 will now be uniformly taxed at 18%. This rationalizes the rates, as previously lithium-ion batteries were taxed at 18% while others were at 28%.
7. What are the changes regarding the Input Tax Credit (ITC) for businesses?
Accumulated ITC: If a business has accumulated ITC at a higher rate before the rate change but makes outward supplies at a lower rate after September 22, 2025, they can still use the credit in their e-credit ledger for any future output tax liability.
ITC on Exempt Goods: If a product now becomes exempt from GST (e.g., UHT milk), the ITC for inputs used to manufacture that product must be reversed. This ensures the tax chain is not broken and prevents manufacturers from benefiting from the exemption.
8. Will the registration threshold change?
No, the registration threshold for goods under the CGST Act, 2017, remains unchanged.
9. What happens if I supplied goods before the rate change but issued the invoice later?
The tax rate will be determined by the time of supply provisions as per Section 14 of the CGST Act. If the payment was received before the rate change, the old rate applies. If the payment is received after the change, the tax rate is determined by the date of either the payment or the invoice, whichever is earlier.
10. How will the new rules affect services like beauty and wellness?
Services like those offered by gyms, salons, barbers, and yoga centers will now be taxed at 5%, a significant reduction from the previous 18%. This is a major relief for the common man and is expected to boost the service sector.