India’s Goods and Services Tax (GST) is undergoing its most significant overhaul since its launch in 2017. After Prime Minister Narendra Modi’s Independence Day announcement of “next-generation GST reforms” as a Diwali gift, Finance Minister Nirmala Sitharaman has unveiled key details of the proposal.

The reforms—aimed at simplification, consumption boost, and affordability—will reshape the GST framework from a multi-tier system into a more streamlined structure.

What’s New: A Tighter, Two-Slab Structure

Currently, GST spans five slabs—0%, 5%, 12%, 18%, and 28%—with extra cesses on sin and luxury goods, a structure often criticised for its complexity, classification disputes, and compliance costs. To simplify, the Group of Ministers has unanimously proposed collapsing it into just two main slabs: 5% and 18%.

• The two main slabs: 
  • 5% – for essential and merit goods 
  • 18% – for most standard goods and services
•  40% slab for sin/luxury goods: Around 5–7 categories (such as tobacco, pan masala, aerated drinks, gambling, and high-end cars) will face a flat 40% GST.
•  0% slab retained: Essential items such as staples, basic medicines, and education-linked goods will continue to enjoy tax exemption.

• A noteworthy exclusion: health and life insurance premiums for individuals are proposed to be exempt from GST, marking a significant relief for policyholders. 

Redistribution of Goods Across Slabs

• Everyday goods: Most items currently taxed at 12%—including packaged foods, sweets, juices, smartphones, and budget hotels—are set to move into the 5% bracket, translating into meaningful savings for consumers.

• Personal care products: Soaps, toothpaste, and hair oils may see tax rates fall from 18% to 5%, giving a boost to India’s fast-growing FMCG market.

• Durables and appliances: Televisions (up to 32”), refrigerators, washing machines, and dishwashers will shift from 28% to 18%, reducing tax burdens significantly.

• Automobiles: Small cars (under 1,200 cc and 4 m in length) and two-wheelers (under 250 cc) will also move from 28% to 18%, a welcome move for middle-class households and India’s auto sector.  

• Luxuries/Sin Goods (5–7 items): A flat 40% GST is proposed for high-end automobiles, tobacco, pan masala, and other demerit goods—outside the aspirational or consumable category. 

The Economic Math Behind GST 2.0

Independent estimates suggest that the reforms could reshape India’s fiscal and consumption landscape in several ways:

• Revenue impact: Annual revenue loss is projected between ₹50,000 crore and ₹1 lakh crore (US $10–12 billion)—roughly 0.15% of GDP. However, policymakers believe that the expected surge in consumption will help offset these losses over time.
• GST rate shift: The effective weighted GST rate may fall from 14.4% to about 9.5%.
• Consumption boost: Lower prices are projected to spur an additional ₹5.3 lakh crore in consumption—roughly 1.6% of GDP.
• Stimulus potential: Combined with income tax reforms, households could gain a fiscal stimulus of 0.6%–0.7% of GDP, per Citi Research.

Markets have already responded positively, with auto and consumer stocks rallying on expectations of stronger demand. While states remain concerned about revenue shortfalls, the Centre believes that increased consumption, industrial activity, and private investment will gradually offset the immediate fiscal hit.

What This Means for Different Stakeholders

For Consumers

Lower GST on daily essentials, FMCG products, and even aspirational items like appliances and small cars will provide significant relief to household budgets. The reform is expected to tame inflation further, making consumption-led growth more sustainable.

For Businesses & MSMEs

The simplification of slabs reduces classification disputes and compliance complexity. Pricing structures will need recalibration, but streamlined rates make long-term planning easier. For MSMEs, which often struggle with GST filings, this reform is expected to ease operational burdens.

For Accountants & Audit Firms

Accounting professionals will play a pivotal role in:

• Reclassifying goods/services under new slabs
• Updating ERP and billing systems
• Advising clients on pricing and working capital impacts
• Reviewing input tax credit (ITC) claims in light of new rates

This reform will increase advisory opportunities, as businesses look for guidance on transition planning.

For States 

States are the most cautious stakeholders. With GST revenues forming a large part of their fiscal resources, they fear erosion of tax collections. Some opposition-led states have already hinted at demanding compensation from the Centre. 

For the Economy Overall 

The reforms are designed to boost domestic demand, support industrial expansion, and neutralise global headwinds such as US tariffs or slowing exports. Analysts suggest GDP could rise by ~0.6% if consumption momentum is sustained. 

What Happens Next?

The Group of Ministers has cleared the proposal, but final approval rests with the GST Council, which brings together the Centre and state finance ministers.

The Council is expected to meet in September–October 2025, with a rollout targeted before Diwali. Officials also see this reform as a “game-changer”—a step toward eventually converging into a single GST slab by 2047, when India marks 100 years of independence.

Final Word

The Next-Generation GST Reforms mark a bold step toward simplifying India’s indirect tax regime. By reducing slabs and cutting rates on mass-consumption items, the government aims to boost spending power, spur industry, and make compliance smoother.

For businesses, accountants, and everyday consumers alike, the transition will require adjustments—but the promise is clear: a simpler, fairer, and more growth-friendly GST system.