India Considers Major GST Overhaul with Rate Cuts on 150+ Items: A Boost for Consumers and Businesses

On August 15, 2025, Prime Minister Narendra Modi announced a major overhaul of India’s Goods and Services Tax (GST) system, dubbed “GST 2.0,” during his Independence Day speech, promising rate cuts on over 150 items as a “Diwali gift” to citizens. The proposed reforms, set for discussion at the GST Council’s 56th meeting on September 3-4, 2025, aim to simplify the current four-tier tax structure (5%, 12%, 18%, 28%) into a two-tier system of 5% and 18%, with a new 40% slab for luxury and sin goods like tobacco and pan masala. Approximately 90% of items in the 28% slab are expected to move to 18%, and 99% of items in the 12% slab to 5%, making essentials and consumer goods more affordable. The reforms also address classification disputes, inverted duty structures, and compliance burdens, supporting India’s economic growth amid global trade tensions, including US tariffs. This article explores the drivers behind the GST overhaul, its historical context, future projections, and impacts across sectors, with a focus on Tamil Nadu’s role.

Why This GST Overhaul Matters

The GST, introduced in 2017, unified India’s fragmented tax system but faced criticism for its complexity and high rates on essentials. The proposed reforms aim to reduce prices on over 150 daily-use and aspirational goods, boost consumption, and enhance ease of doing business, particularly for MSMEs. Tamil Nadu, a manufacturing and retail hub, stands to benefit from lower input costs and increased consumer spending, reinforcing its economic significance in sectors like automotive, textiles, and electronics.

Latest Developments Driving the GST Overhaul

The GST 2.0 proposal, initiated post the February 2025 Union Budget, responds to industry demands, state government inputs, and global economic challenges. The Finance Ministry’s plan, reviewed by the Group of Ministers (GoM) led by Bihar Deputy Chief Minister Samrat Choudhary on August 20-21, 2025, has been endorsed for GST Council approval. Key changes include:

• Rate Simplification: The four-tier structure (5%, 12%, 18%, 28%) will be reduced to 5% (merit rate) and 18% (standard rate), with a 40% slab for 5-7 sin goods (e.g., tobacco, pan masala) and luxury items like high-end vehicles. The 0% slab remains for essentials like milk and eggs.
• Item-Specific Cuts: Over 150 items are targeted for rate reductions, including:
• Essentials: Ghee, butter, packaged foods, fruit juices, coconut water, toothpaste, soap, shampoo, umbrellas, pressure cookers, sewing machines, bicycles (12% to 5%).
• Consumer Durables: Air conditioners, TVs (up to 32 inches), dishwashers, cement, washing machines (28% to 18%).
• Automotive: Small petrol (<1200cc) and diesel (<1500cc) cars, hybrid cars, commuter motorcycles, and scooters (<350cc) (28% to 18%).
• Insurance: Health and life insurance premiums may drop from 18% to 5% or 0%.
• Cess Phase-Out: The compensation cess, set to end on March 31, 2026, will be replaced by the 40% slab, simplifying taxation on luxury goods like cars.
• Procedural Reforms: Pre-filled GST returns, automated refunds, and simplified registration will reduce compliance burdens for MSMEs and startups.
• Economic Context: The reforms aim to offset US tariffs (50% on Indian imports, effective August 27, 2025) by boosting domestic consumption and supporting sectors like textiles and automotive.

The GST Council’s September meeting will finalize the structure, with implementation targeted for October 2025, aligning with the Diwali shopping season.

Tamil Nadu’s Role

Tamil Nadu, a key industrial state, will benefit from lower GST rates on automotive, textiles, and electronics, with Chennai’s manufacturing hubs and retail markets driving consumption. Companies like TVS Motor and textile firms in Coimbatore will see cost reductions, while the state’s MSMEs gain from simplified compliance.

Historical Context of India’s GST System

Introduced on July 1, 2017, under the One Hundred and First Amendment to the Constitution, GST replaced multiple indirect taxes like VAT, excise duty, and service tax, aiming for a unified “one nation, one tax, one market” framework. Despite its success in boosting revenue (Rs 20.6 lakh crore in FY24), the system faced challenges:

• Complex Structure: Four slabs (5%, 12%, 18%, 28%) and additional cesses led to classification disputes, e.g., caramel popcorn (18%) vs. salted popcorn (5%).
• Compliance Issues: Technical glitches in the GSTN portal and complex return filings burdened small businesses.
• Previous Reforms: The GST Council, comprising central and state finance ministers, has revised rates multiple times, e.g., reducing rates on 178 items in 2017 and rationalizing restaurant taxes in 2019.
• Revenue Dynamics: The 18% slab generates 67% of GST revenue, 28% contributes 11%, 12% adds 5%, and 5% accounts for 7%. The effective GST rate dropped from 15.6% in 2017 to 11.6% by 2024 due to incremental cuts.

The 2025 overhaul is the most significant since 2017, addressing long-standing demands for simplification and affordability.

Future Scopes and Projections

The GST 2.0 reforms are projected to boost India’s GDP by 0.6-0.7% in FY26 by increasing consumption, with taxable consumption estimated at Rs 150-160 lakh crore. The Bank of Baroda predicts a Rs 0.7-1 lakh crore spending boost, particularly in food, consumer durables, and automotive sectors.

Long-Term Strategic Outlook

By 2030, GST 2.0 aims to:

• Enhance Affordability: Lower rates on essentials and durables will increase disposable income, particularly for rural and middle-income groups.
• Boost MSMEs: Simplified compliance and lower input costs will formalize the unorganized sector, expanding the tax base.
• Support Atmanirbhar Bharat: Reduced taxes on farm equipment, textiles, and fertilizers will strengthen domestic manufacturing amid US tariff pressures.
• Reduce Inflation: Lower GST on cement and auto parts could cut construction costs, impacting 8.5% of the CPI basket and easing CPI/WPI inflation.

Potential Challenges

• Revenue Shortfall: Rate cuts may cost 0.2-0.4% of GDP annually (Rs 50,000 crore), though increased consumption and compliance are expected to offset losses.
• State Resistance: States reliant on GST revenue (e.g., West Bengal’s call for additional levies) may oppose cuts without compensation mechanisms.
• Implementation Timing: Delays in GST Council approval could disrupt festive season sales, as consumer anticipation has already slowed purchases.
• Classification Disputes: Ensuring uniform taxation for similar items (e.g., all namkeen at 5%) requires clear guidelines to avoid litigation.

Impacts on the Indian Economy and Stakeholders

The GST overhaul will reduce prices, stimulate demand, and enhance business competitiveness, with Tamil Nadu’s industries playing a pivotal role.

Sector-Wise Impacts

Consumer Goods and Retail

• Impact: Lower GST on toothpaste, soap, shampoo (18% to 5%) and small FMCG sachets (12% to 5%) will boost affordability, benefiting firms like Hindustan Unilever and Godrej Industries. Tamil Nadu’s retail markets in Chennai will see increased festive season sales.
• Economic Contribution: The sector could add Rs 5,000 crore to GDP, with Tamil Nadu contributing 15% through retail and FMCG manufacturing.
• Business Opportunities: Retail chains and e-commerce platforms in Tamil Nadu will see higher sales, with logistics firms benefiting from increased distribution.

Automotive

• Impact: GST cuts on small cars, hybrids, and two-wheelers (28% to 18%) will revive demand, benefiting Tamil Nadu-based TVS Motor and Maruti Suzuki’s supply chain. However, EV makers like Tata Motors warn of slower EV adoption.
• Economic Contribution: The sector could contribute Rs 7,000 crore to GDP, with Tamil Nadu gaining 20% through its auto manufacturing hubs.
• Business Opportunities: Auto dealers and component suppliers in Chennai will see increased orders, with NBFCs benefiting from higher auto loan demand.

Construction and Real Estate

• Impact: Cement’s GST reduction (28% to 18%) will lower construction costs, boosting housing and infrastructure in Tamil Nadu’s urban centers like Chennai and Coimbatore.
• Economic Contribution: The sector could add Rs 3,000 crore to GDP, with Tamil Nadu contributing 10% through construction activities.
• Business Opportunities: Real estate developers and cement suppliers like India Cements in Tamil Nadu will see improved margins and demand.

Insurance and Healthcare

• Impact: Potential GST cuts on health and life insurance (18% to 5% or 0%) will reduce premiums, increasing coverage penetration. Tamil Nadu’s healthcare sector will benefit from lower taxes on medical devices.
• Economic Contribution: The sector could save households Rs 2,000 crore annually, with Tamil Nadu gaining from medical tourism and device manufacturing.
• Business Opportunities: Insurers like Star Health in Chennai will see higher subscriptions, with hospitals benefiting from affordable equipment.

Textiles and Agriculture

• Impact: Lower GST on textiles, fertilizers, and farm equipment (12-18% to 5%) will support Tamil Nadu’s textile hubs in Coimbatore and Tiruppur, and rural farmers.
• Economic Contribution: The sectors could add Rs 4,000 crore to GDP, with Tamil Nadu contributing 25% through textiles and agriculture.
• Business Opportunities: Textile exporters and agri-tech firms in Tamil Nadu will gain from lower input costs and export competitiveness.

GST Rate Changes Snapshot

This table summarizes key rate changes and Tamil Nadu’s benefits.

Frequently Asked Questions (FAQs)

What is the proposed GST overhaul?

The GST 2.0 reform proposes a two-tier tax structure (5%, 18%) with a 40% slab for sin goods, eliminating 12% and 28% slabs, and cutting rates on over 150 items to boost affordability and consumption.

Which items will see GST rate cuts?

Essentials like ghee, butter, toothpaste, and bicycles (12% to 5%), and durables like cement, ACs, and small cars (28% to 18%) will become cheaper, along with health insurance (18% to 5% or 0%).

How will Tamil Nadu benefit?

Tamil Nadu’s automotive, textile, and retail sectors will see lower input costs and higher demand, boosting GDP by Rs 5,000 crore and creating opportunities for MSMEs and exporters.

What are the challenges of the GST reform?

A potential revenue shortfall of 0.2-0.4% of GDP, state resistance, and implementation delays could pose risks, though higher consumption may offset losses.

When will the reforms be implemented?

The GST Council will finalize the proposal in September 2025, with rate cuts targeted for October 2025, before Diwali.