Next Gen GST 2.0 Reforms
|
General Studies Paper II: Government Policies & Interventions, Growth & Development |
Why in News?
The Goods and Services Tax Council in its 58th meeting approved the launch of Next Gen GST 2.0 reforms aimed at simplifying the indirect tax system for businesses and consumers.
- The new framework focuses on moving towards a two-rate structure to reduce complexities and improve compliance efficiency.
- The revised rate changes are expected to come into force from September 22, 2025.
Key Highlights of Next Gen GST 2.0 Reforms
The next gen GST 2.0 reforms is mainly focused on the rationalisation of GST slabs. The old system with multiple tax rates of 5%, 12%, 18%, and 28% has been replaced by a two-slab structure of 5% and 18%, along with a 40% slab reserved only for sin and luxury goods.
- Daily-Use Items: One of the most visible changes in GST 2.0 is the significant reduction in tax rates on essential and household products. Items such as packaged food including juices, butter, cheese, coconut water, pasta, and dry fruits have now been placed in the 5% slab. Everyday utilities such as erasers used by students are included in the GST-free list.
- Healthcare: The healthcare sector also receives strong support, as medical supplies like oxygen cylinders, gauze, bandages, and diagnostic kits are shifted from 12% to 5%. This directly reduces the cost of treatment.
- Food Products: Several essential food products like ultra-high temperature milk, paneer, chapatis, khakra, pizza bread, and parathas have been completely exempted from GST.
- Household Goods: Household goods have been made more accessible too. Hair oil, soaps, shampoos, bicycles, kitchenware, and tableware are now taxed at only 5%, down from earlier higher slabs.
- White Goods: A major announcement within GST 2.0 is the reduction of tax rates on white goods and automobiles, which are large contributors to consumer demand. Items like air conditioners, televisions, and dishwashers have been shifted from the highest slab of 28% to 18%. This reduction is expected to boost sales of consumer durables.
- Automobiles: For the automobile sector, the relief is even more pronounced. Small cars powered by petrol up to 1200 cc and diesel up to 1500 cc will now fall under the 18% GST slab, down from the earlier 28%. Motorcycles under 350 cc and all categories of auto parts are also shifted to the 18% rate.
-
-
- At the same time, luxury cars and high-end vehicles are taxed at 40%, keeping in line with the principle of taxing luxury consumption at higher rates.
-
- Service Sector: The government has decided to exempt life and health insurance policies from GST, covering products such as term plans, endowment policies, ULIPs, and family floaters.
- Personal services have also seen rate reductions. Gyms, yoga centres, salons, and barber shops, which were earlier taxed at 18%, now come under the 5% slab.
- Sector-Specific: Beyond general reductions, GST 2.0 has made sector-specific adjustments to address industry demands.
-
- In textiles, the duty on man-made fibre has been reduced from 18% to 5%, while man-made yarn has been lowered from 12% to 5%, easing costs across the value chain.
- In the fertilizer sector, inputs such as sulphuric acid, nitric acid, and ammonia have been reduced from 18% to 5%.
- In healthcare service, 33 lifesaving medicines have been exempted, ensuring affordability for critical treatments. Vision correction items like spectacles now attract only 5% GST compared to 28% earlier.
Benefits of Implementing the Next Gen GST 2.0 Reforms
- Lower Household Expenditure: The biggest benefit of GST 2.0 is that it reduces the cost of essential goods and services for families. Items of daily use have been placed in the 5% slab, which was earlier higher. This change means that middle-class households and lower-income families will spend less on their monthly budgets. It directly supports consumption demand and improves affordability.
- Improved Access to Healthcare: The reforms give relief to the healthcare sector by cutting GST on medical items. As a result, hospitals and pharmacies will be able to supply treatment at lower costs. Reducing such indirect tax burden makes access to treatment more affordable for millions of people.
- Support for Agriculture: The reduction of GST on fertiliser will directly benefit the agriculture sector. Lower tax rates on these inputs mean fertilisers can be manufactured at a lower cost, which eventually reduces the price for farmers. This helps in controlling the cost of cultivation and supports farm incomes. Such reforms will create a positive impact on rural demand and food production.
- Strong Push for Automobiles: The automobile industry, which contributes nearly 7% of India’s GDP and 49% of manufacturing GDP, is expected to benefit from reduced tax rates on small cars, motorcycles, and auto parts. This step also encourages demand for fuel-efficient small vehicles, which are popular among the middle class. It helps automobile companies recover from slowdown pressures and supports job creation.
- Encouragement for Green Mobility: Electric vehicles continue to enjoy the concessional 5% GST rate, ensuring sustained support for eco-friendly mobility. This is important because India has set a target to achieve 30% EV penetration by 2030. Lower GST on EVs reduces upfront purchase cost and supports the creation of an eco-friendly transport ecosystem.
- Relief for Service Sector: By exempting life and health insurance from GST and reducing rates on personal services it directly reduces expenses for households. Insurance becomes more affordable, encouraging more families to opt for financial protection. The service sector, which contributes nearly 54% of India’s GDP in 2023–24, will see higher participation from consumers.
- Long-Term Fiscal Stability: Simplified slabs reduce the scope for evasion, while lower rates encourage more formalisation of trade. The government estimates a net fiscal impact of ₹48,000 crore based on 2023–24 consumption data, which it considers manageable. In the long term, it strengthens the ease of doing business ranking, where India already improved from 142 in 2014 to 63 in 2020. The Centre expects the reforms to push overall consumption growth by 1.5% of GDP in 2025–26.
Related Articles
