Finance Minister Nirmala Sitharaman announced a significant overhaul of the Goods and Services Tax (GST). This is the most critical change since GST was introduced in 2017.
The new system, called "GST 2.0", simplifies taxes into a two-slab structure. This will lower taxes on many items, including everyday essentials, medicines, and cars. At the same time, a new, higher tax slab will be created for luxury and "sin goods" like tobacco and alcohol.
Sitharaman stated that these reforms were made with the agreement of everyone. She said the two-slab system and the issue of compensation for states were key topics that the GST Council discussed and agreed upon unanimously.
In this article, we'll break down what these changes mean for you and how they will affect prices and the economy.
New GST Rate vs Old GST Rate: A Detailed Comparison
Historic… The GST Council has approved the most sweeping rate cuts so far, bringing real relief to the people. With this, GST reduction on any item will no longer require repeated parliamentary interventions. #GSTReforms pic.twitter.com/DA3xBJWZOD
— Vijayasai Reddy V (@VSReddy_MP) September 4, 2025
On Wednesday, i.e., three September 2025, India's Goods and Services Tax (GST) council approved a complete overhaul of the tax system to help boost spending and soften the impact of US tariffs.
The new system will simplify the current four tax rates (5%, 12%, 18%, and 28%) into just two: 5% and 18%. This change will reduce taxes on many everyday items, from toothpaste and medicine to cars and home appliances.
A new, higher tax rate of 40% will be created for a few luxury and "sin" items like high-end cars, tobacco, and cigarettes.
Most of these new tax rates will take effect on September 22. However, the changes will not apply to products like chewing tobacco, cigarettes, and bidis.
What Will Get Costlier?
| Category | Item | Old GST Rate | New GST Rate |
| Aerated & Caffeinated Drinks | Soft drinks (Coca-Cola, Pepsi), other non-alcoholic drinks, caffeinated beverages, and goods with added sugar or flavouring | 18% - 28% | 40% |
| Vehicles | Automobiles over 1,200 cc and longer than 4,000 mm; motorcycles over 350 cc; personal yachts, aircraft, and racing cars | 28% | 40% |
| Leisure Activities | Race club services, leasing and rental services, casinos, gambling, horse racing, lottery, online money gaming, and IPL tickets | Varies | 40% |
| Tobacco Items | Tobacco and related products | 28% + Compensation Cess | Will become 40% once pandemic-related loans are repaid |
What will get Cheaper?
| Category | Item | Old GST Rate | New GST Rate |
| Food & Beverage | Chapati, Parantha, Ultra-high-temperature milk, Paneer, Pizza bread, Khakra | 5% | 0% |
| Butter, Ghee, Dry nuts, Condensed milk, Meat, Sugar confectionery, Jam, Tender coconut water, Namkeen, Bottled water, Juices, Ice cream, Biscuits, Corn flakes, Cereals | 18% | 5% | |
| Other fats, Cheese, Plant-based milk drinks, Soya milk drinks | 12% - 18% | 5% | |
Household Items | Tooth powder, Feeding bottles, Kitchenware, Umbrellas, Utensils, Bicycles, Combs | 12% | 5% |
| Shampoo, Talcum powder, Toothpaste, Soap, Hair oil | 18% | 5% | |
| Household Appliances | Air conditioners, Dishwashers, TVs | 28% | 18% |
Stationary | Maps, Charts, Globes, Pencils, Sharpeners, Crayons, Notebooks | 12% | 0% |
| Erasers | 5% | 0% | |
| Footwear & Textiles | Mass-market footwear and textiles | 12% | 5% |
| Healthcare | Life-saving drugs, Medical devices, Thermometers, Diagnostic kits, Corrective spectacles | 12% - 18% | 5% or 0% |
Insurance | Individual life and health insurance policies | Varies | 0% |
| Third-party insurance for goods carriers | 12% | 5% | |
Hotel & Travel | Hotel rooms up to ₹7,500 | 12% | 5% |
| Economy class flight tickets | Varies | 5% | |
Vehicles & Fuel | Motorcycles up to 350cc, Small hybrid cars | 28% | 18% |
| Auto components | 28% | 18% | |
| Small petrol and diesel vehicles | 28% | 18% | |
| Construction | Cement | 28% | 18% |
| Agriculture | Sewing machines, Agricultural machinery, Fertiliser inputs (Sulphuric acid, etc.), Biopesticides, Micro-nutrients, Tractor components | 12% - 18% | 5% |
| Services | Health clubs, Salons, Barbers, Fitness centres, Yoga | 18% | 5% |
Conclusion: What Has Changed?
| Type of Item | Old GST Rate(s) | New GST Rate (from Sept. 22, 2025) |
| Essential Items & Food | 0%, 5%, 12%, 18% | Mostly 5%; some remain 0% (e.g., chapati, paneer, and some stationery) |
| Household & Personal Care | 12%–18% | 5% (includes medicines, toothpaste, shampoo, soap, bicycles, and household items) |
| Appliances & Small Vehicles | 18%–28% (+ cess in some cases) | 18% (includes consumer electronics like TVs and ACs, small cars, motorcycles under 350cc, and cement) |
| Electric Vehicles | 5% | 5% (no change) |
| Clothing | 12% | 5% |
| Luxury Goods | 28% + cess (up to 50-60%) | 40% (no extra cess) |
| Tobacco & "Sin" Goods | 28% + compensation cess | 40% (will be implemented after certain loans are repaid; for now, old rates continue) |
| Services | 12% - 18% | 5% (for health clubs, salons, and some hotel rooms and flights) |
Old GST Structure (Before September 22, 2025)
India's GST had multiple tax slabs, applied based on the type of item:
- 0% – For essential items such as unprocessed food grains, fresh fruits, and vegetables.
- 5%, 12%, 18%, 28% – The main slabs cover a wide range of goods and services.
- In addition, some products had additional cesses on top of the 28% slab—for example, luxury cars, tobacco products, and aerated drinks.
- This setup often created confusion, with many overlapping categories.
New GST Structure (From September 22, 2025, Onwards)
A significant simplification brings in a streamlined system:
- 5% slab – Now covers many everyday essentials such as packaged food, soaps, medicines, toothpaste, milk products, and even life & health insurance (now fully GST-exempt).
- 18% slab – Applies to standard goods and services, including appliances, TVs, cement, and small cars (previously at higher rates).
- 40% slab – Introduced for “sin goods” and luxury items, such as tobacco, cigarettes, and high-end cars. The previous 28% slab is removed for these goods.
- 0% (exempted) – This rate still applies to fundamental essentials, such as some fresh food items.
Important dates:
- The new rates (5%, 18%, 40%) take effect from September 22, 2025.
- Exception: Items like cigarettes, gutkha, and pan masala (carrying compensation cess) will continue under old rates until the government repays those cess loans.
Summary of changes:
- GST slabs reduced from five to two, plus a dedicated high-sin slab.
- Simplified structure: 5% for essentials, 18% for most goods/services, and 40% for luxury/sin.
- Life & health insurance is now GST-exempt.
- Cess abolished for many goods—replaced by the flat 40% sin/luxury rate.
- These changes aim to reduce inflation, lower costs for everyday goods, and stimulate consumer demand during festive seasons.
What's Next| New GST Slab Introduced: List of Items under Highest GST Rate
Comments
All Comments (0)
Join the conversation