The Indian middle class can look forward to an early Diwali celebration as Finance Minister Nirmala Sitharaman announced the rollout of GST 2.0, effective September 22, 2025. This revamped Goods and Services Tax (GST) system promises a simplified tax structure and several changes to the way goods are taxed, potentially easing the financial burden on households.

Simplified Tax Structure

The most significant change is the introduction of a simplified two-slab GST structure of 5% and 18%. This replaces the previous multi-layered system, aiming to reduce compliance complexities and disputes. Essential goods and services will fall under the 5% slab, while most other items will be taxed at 18%. A special higher tax slab of 40% has been introduced for luxury and sin goods.

Cheaper Daily Essentials

The GST overhaul brings good news for household budgets, with many daily-use items becoming more affordable. Several items, including UHT milk, paneer, and all Indian breads, now attract nil GST, moving from the earlier 5% slab. Other food items such as namkeen, sauces, pasta, instant noodles, coffee, butter, and ghee will also be taxed at a lower rate of 5%. Common household items like hair oil, toilet soaps, shampoos, toothbrushes, and bicycles will also see a reduction in GST, now attracting only 5% tax, down from 18%.

Impact on Other Sectors

The changes extend beyond just daily essentials. Healthcare will also become less expensive, with the government removing GST on 38 life-saving medicines that previously attracted 12% tax. Spectacles and goggles used for vision correction will now be taxed at only 5%, a significant reduction from the previous 28%. The government has reduced GST rates on smaller vehicles. Cement, a key construction material, sees its GST rate reduced to 18% from 28%.

Luxury and Sin Goods

While many items see a reduction in GST, luxury and sin goods will face higher taxation. A new 40% tax slab will apply to all types of aerated water, carbonated beverages, caffeinated drinks, and non-alcoholic beverages. Motorcycles with an engine capacity above 350cc, helicopters, and yachts will also fall under this category. Items like pan masala, cigarettes, gutka, beedi, and tobacco products will continue to be taxed at the old GST rate of 28% until all pending loans and compensation payments are cleared. GST will be levied on the retail sale price of tobacco products.

Winners and Losers

The immediate winners of GST 2.0 appear to be FMCG, textiles, and other mass-market goods. Consumers could see benefits right away with lower rates and input tax credits intact. Fertilisers and construction materials may also get cheaper, helping the housing and infrastructure push. The picture is less clear for sectors like autos and electronics.

Balancing Act

Sujan Hajra, Chief Economist at Anand Rathi, framed it as a balancing act. He said there is a trade-off between revenue collection and consumption. In the short run, GST 2.0 may put pressure on revenues. However, by boosting demand and widening the base, the government hopes to make up for the shortfall in the medium term.

Industry Expectations

India Inc. seeks stronger dispute resolution from GST 2.0. A Deloitte survey highlights that the biggest expectation is creating a robust dispute resolution mechanism with time-bound audits and consistent rulings across central and state authorities, which companies say is crucial to cut down on litigation and uncertainty. Businesses also want GST rate rationalisation, particularly the removal of the inverted duty structure, along with clearer rules to prevent expansive pro-revenue interpretations by tax officials.

Overall Impact

GST 2.0 aims to simplify the tax structure, boost demand, and make daily essentials more affordable. The reform balances revenue concerns with the potential for increased consumption, impacting household budgets and corporate strategies. The changes, effective from September 22, 2025, are expected to bring a wave of Diwali cheer to the Indian middle class.