Massive GST Rate Cuts to Boost Consumption
In a major overhaul of the Goods and Services Tax, the government has reduced rates on nearly 400 goods and services. The new simplified two-tier structure of 5% and 18% will replace the previous four-tier system, making everyday items more affordable for consumers. This change, which comes into effect on September 22, 2025, is timed to coincide with the festive season, with the goal of driving up consumption and economic growth.
The rate cuts are significant, with many items moving from the 28% and 12% slabs to the new, lower rates.
- Household Items: Personal care products like hair oil, soap, shampoo, and toothpaste have been reduced from 18% to 5%.
- Automobiles: The GST on most small cars, two-wheelers, and commercial vehicles has been cut from 28% to 18%.
- Consumer Durables: Items such as air conditioners and TVs over 32 inches, which were previously in the 28% slab, are now taxed at 18%.
- Essential Foods: Many dairy products, including UHT milk, paneer, and Indian breads, are now tax-free, while butter, ghee, and cheese have been reduced from 12% to 5%.
Firms Must Pass on the Benefits
Both Finance Minister Nirmala Sitharaman and CBIC Chairman Sanjay Kumar Agarwal have stressed that companies are obligated to pass the full benefit of these tax cuts on to consumers. The government will be closely monitoring price trends, and Sitharaman has stated that this will be her primary focus from September 22.
The CBIC has said that while they are confident most industries will comply voluntarily, they are prepared to intervene if complaints of non-compliance are received. They will work with specific industry bodies to address any issues.
Impact on Specific Sectors
- FMCG and Durables: Companies are already preparing to update their systems to reflect the new rates. Some, like Hyundai and Tata Motors, have already announced major price reductions. Challenges remain, however, as some companies have a large inventory with pre-printed MRPs. Industry bodies have asked the government to allow them to sell these products at reduced prices to avoid significant waste.
- Insurance: Individual health and life insurance policies are now exempt from GST, a move that is expected to save consumers around 18% on premiums and encourage wider adoption of insurance.
- Luxury and Sin Goods: A new 40% tax bracket has been created for certain luxury and sin goods. This includes high-end cars, pan masala, and cigarettes. The existing compensation cess on these products will continue until the government’s loan repayment obligations are fully discharged.
Temporary Revenue Dip and Future Outlook
The CBIC chief acknowledged that GST collections might see a temporary dip in the initial months as businesses utilize accumulated input tax credits. However, he expects the increase in consumer demand from the festive season to offset this, leading to higher revenue collection in the long term. The government views these reforms not just as a revenue-neutral exercise but as a strategic move to simplify the tax structure, boost the economy, and improve the ease of doing business.