Finance Minister Nirmala Sitharaman has announced a significant overhaul of the Goods and Services Tax (GST) system, effective September 22, 2025, which aims to simplify the tax regime and address long-standing issues related to the classification of goods and services. The GST Council, led by Sitharaman, has decided to reduce the number of tax slabs from four to two, eliminating the 12% and 28% rates, while retaining the 5% and 18% slabs. A 40% slab will be levied on sin goods and services.

One of the primary goals of the GST revamp is to resolve classification-related issues that have plagued the system since its inception. Previously, the multiple tax slabs led to confusion and disputes over the correct classification of goods, resulting in frequent litigation and compliance challenges for businesses. Sitharaman highlighted the confusion over GST rates on items like popcorn, which were taxed at different rates (5%, 12%, or 18%) depending on the type. To address this, the new GST regime will implement simplified classifications, ensuring that all types of popcorn, whether salted, spiced, or caramel, will be subject to a uniform 5% GST, regardless of whether they are sold loose or packaged. Similarly, items of daily use for the common man will attract lower tax rates.

The simplification of the GST structure is expected to benefit both businesses and consumers. By reducing the number of slabs and simplifying classification, the government aims to lower compliance costs for businesses, promote ease of living, and bring more stability and predictability to the GST system. The revised rates for common man items such as hair oil, toilet soap, shampoo, toothpaste, and bicycles have come down to 5%. Essential goods and a wide range of consumer products will be taxed at 5%, while most other items will fall under the 18% category. Luxury cars, premium products, and items considered harmful will be placed in the highest 40% bracket.

The Finance Minister also addressed the exclusion of petrol and diesel from the GST regime, stating that while the government is legally ready to include these fuels, the decision must come from the states. Currently, petrol and diesel are taxed through excise duty by the central government and VAT by the state governments, both of which rely heavily on the revenue generated from these taxes. Therefore, a shift to GST would be a sensitive and complex matter.

The GST Council has also made efforts to correct the inverted duty structure in sectors like textiles. The GST rate on man-made fiber has been reduced from 18% to 5%, and on man-made yarn from 12% to 5%, addressing anomalies and ensuring that there are no further inversions. Additionally, health and life insurance premiums for individuals are now exempt from GST, making these essential services more affordable.

Overall, the GST 2.0 aims to create a more streamlined, efficient, and user-friendly tax system that promotes economic growth, eases the burden on consumers, and reduces compliance costs for businesses.