India’s indirect tax framework is undergoing its most important reform since the launch of the Goods and Services Tax (GST) eight years ago. The GST Council, chaired by Union Finance Minister Nirmala Sitharaman, has approved sweeping reforms that aim to simplify the tax system and ease financial pressure on ordinary households, small businesses, and farmers. These changes will take effect from September 22, 2025, just before the festive season. The timing is crucial, as the Indian economy is dealing with slowing global trade and a 50 per cent tariff recently imposed by the United States on a wide range of Indian exports. The government hopes that the new system will encourage domestic spending and soften the blow from international headwinds.
GST Slabs Restructured
The heart of the reform is a complete restructuring of the GST slab system. The earlier four-tier structure of 5, 12, 18, and 28 per cent has been replaced with two standard rates 5 per cent and 18 per cent. In addition, a new 40 per cent slab has been created for luxury and sin goods such as premium cars, fizzy drinks, and tobacco products. By simplifying the slab structure, the government seeks to make the system more transparent and consumer-friendly.
Relief for Car Buyers
One of the sectors to see immediate benefits is the automobile industry. Small cars defined as petrol vehicles up to 1200 cc or diesel vehicles up to 1500 cc with a maximum length of four metres will now attract 18 per cent GST instead of the earlier 28 per cent. Popular models such as the Maruti Suzuki Alto, Swift, Fronx, Tata Punch, and Hyundai i10 are expected to become more affordable, giving relief to middle-class families. On the other hand, luxury and premium cars will be taxed at 40 per cent, keeping high-end purchases within the ambit of heavy taxation.
Impact on Household Budgets
The reforms have a strong focus on reducing everyday expenses for families. Finance Minister Sitharaman emphasised, “These reforms have been carried out with a focus on the common man. Every tax on the common man’s daily use items has gone through a rigorous review and in most cases the rates have come down drastically… Farmers and the agriculture sector, as well as the health sector, will benefit.” Essential food products such as frozen parathas, chapatis, khakhra, pizza bread, paneer, and UHT milk have been made GST-free. Plant-based milk and soya milk drinks will now be taxed at only 5 per cent, while butter, ghee, jams, sauces, packaged namkeens, chocolates, cereals, and dry fruits have also shifted to the 5 per cent slab. These cuts are expected to lower grocery bills and provide some relief from rising food inflation. Personal care and daily household products like shampoos, hair oils, toothpaste, combs, kitchenware, umbrellas, bamboo furniture, and bicycles will also attract only 5 per cent GST, down from 18 per cent earlier.
Cheaper Festive Shopping
The festive season, particularly Navratri and Diwali, has always been a time of high consumer spending, especially on household appliances and electronics. Under the new GST rates, products like air conditioners, refrigerators, washing machines, and large-screen televisions will be taxed at 18 per cent instead of 28 per cent. This reduction is expected to make big-ticket purchases more affordable and give a much-needed boost to retailers and manufacturers during a period when sales are traditionally strong.
Relief in Health and Insurance
Healthcare and insurance sectors have also received significant relief. The GST Council has completely removed tax on individual health and life insurance premiums, which were earlier charged at 18 per cent. Sitharaman explained, “Exemption of GST on all individual life insurance policies, whether term life, ULIP, or endowment policies… will make insurance affordable for the common man and increase the insurance coverage in the country.” In addition, more than 30 specialised drugs, including those used for cancer and rare diseases, have been made tax-free, which will ease the burden on patients who require costly treatments.
Direct Support for Farmers
The government has also targeted the agricultural sector with special concessions. Tractors and tractor parts, which earlier attracted GST rates between 12 and 18 per cent, will now be taxed at only 5 per cent. Essential farming inputs such as bio-pesticides, micronutrients, drip irrigation systems, and agricultural machinery have also been shifted to the 5 per cent slab. Prime Minister Narendra Modi has repeatedly stated his government’s commitment to farmers, declaring, “For us, the interest of our farmers is our top priority. India will never compromise on the interests of farmers, fishermen, and dairy farmers.” These tax cuts are expected to help farmers reduce costs and improve profitability at a time when global trade disruptions are already adding pressure on agriculture.
Benefits for Students
Students and families will also feel the impact of the reform. Educational supplies such as maps, globes, notebooks, pencils, crayons, sharpeners, pastels, and erasers have been fully exempted from GST. By making these items cheaper, the government aims to make education more affordable and accessible, particularly for lower-income families.
Luxury Goods and the Rich
The reforms also include adjustments that affect wealthier consumers. Luxury cars, previously burdened with high GST plus a compensation cess, will now fall under the 40 per cent slab. This is expected to slightly lower the price of premium models from global brands such as Mercedes-Benz, BMW, and Jaguar Land Rover, though they will remain heavily taxed. Apparel costing more than ₹2,500 will now face 18 per cent GST instead of 12 per cent, impacting international fashion labels. The tax on coal has been raised from 5 to 18 per cent, which could have consequences for electricity generation costs. Fizzy drinks and tobacco products will continue to be taxed at the highest rate of 40 per cent, keeping them out of reach as non-essential goods.
Why These Reforms Were Needed
The GST overhaul comes in the wake of international economic pressure. On August 27, 2025, the United States imposed 50 per cent tariffs on Indian exports worth $60.2 billion. This move hit industries such as textiles, seafood, gems, jewellery, and leather, which are deeply connected with small and medium enterprises. Economists estimate that the tariffs could trim India’s GDP growth by 0.4 to 0.6 per cent in FY26, leading to job losses and reduced investment. The seafood industry, for example, has already reported price falls of up to 70 cents per kilogram, directly affecting coastal communities. By lowering domestic taxes, the government hopes to strengthen internal demand and protect vulnerable groups from external shocks.
What It Means for the Middle Class
Earlier this year, the government announced that annual income up to ₹12 lakh would be tax-free. With the GST reform, this limit has been raised slightly, and individuals earning up to ₹12.75 lakh will now have no income tax liability. Combined with the reductions in GST on essential goods, this move is expected to leave more disposable income in the hands of the middle class. The timing of the reform, just before the festive season, is expected to encourage higher spending and support broader economic activity. Prime Minister Modi summed up the intent of the reform in a social media post: “The wide-ranging reforms will benefit… the common man, farmers, MSMEs, middle-class, women and youth.”
Also Read: New GST Implementation Date: Check Latest Changes From Slabs to Sector-specific Rates
