GST Council Approves Two-Slab GST Structure: 5% and 18% from September 22, 2025
The 56th GST Council meeting has cleared one of the most significant overhauls of India’s indirect tax system since GST’s launch in 2017. The Council has approved a two-slab structure—5% and 18%, replacing the earlier four-tiered system of 5%, 12%, 18%, and 28%. The changes will be implemented from September 22, 2025, just ahead of the festive season.
The reform, described as a “Diwali gift” in Prime Minister Narendra Modi’s Independence Day speech this year, aims to simplify compliance, lower costs, and boost consumption.
Key Highlights of the GST Reform
- Two Main Slabs: The tax system now shifts to a simplified dual structure—5% for essentials and merit goods, 18% for most other goods and services.
- Special High Rate: A 40% tax slab will apply to luxury and sin goods such as pan masala, gutkha, and cigarettes, though implementation for some items will continue under existing rates until compensation cess liabilities are cleared.
- Effective Date: The new GST structure will be enforced nationwide from September 22, 2025.
- Lower Weighted Average: The effective GST rate is expected to decline to around 9.5%, improving affordability for middle-class households.
- Revenue Impact: A short-term revenue loss of nearly ₹93,000 crore is projected, but the Centre expects recovery as compliance and consumption rise.
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Why the Council Approved the Change
The GST Council said the rationalization was necessary to reduce complexity and disputes arising from multiple tax slabs. Businesses, particularly MSMEs, often faced confusion over classification under 12% and 18% brackets, leading to litigation.
With a simplified two-rate system, compliance is expected to become easier, onboarding faster, and costs lower. The government has also promised to cut MSME GST registration timelines from several weeks to three days.
According to Finance Minister Nirmala Sitharaman, the reform is designed to “improve ease of doing business, reduce prices for the common man, and create a cleaner, more predictable tax system.”
What It Means for Consumers
The new GST structure is expected to reduce prices across a wide range of products and services, directly benefiting households:
- FMCG & Packaged Food: Items like biscuits, dairy products, packaged snacks, and beverages moving from 12% to 5% will become cheaper. This will ease monthly grocery bills.
- Consumer Durables: Mid-range electronics such as refrigerators, washing machines, mixers, and televisions currently taxed at 28% will now fall under the 18% slab, making big-ticket purchases more affordable.
- Home & Kitchen Appliances: Products like fans, water purifiers, and induction cooktops will get cheaper as they move from 18% to 12%/5% equivalent under the rationalized slabs.
- Mobiles & Gadgets: Mobile phones and accessories taxed at higher rates will now be under 18%, encouraging digital adoption.
- Healthcare: Life-saving drugs and certain health insurance premiums are likely to see reduced or exempted GST, especially benefiting senior citizens.
- Travel & Hospitality: Hotel tariffs below ₹7,500 will now face a lower effective tax burden, supporting the tourism and hospitality sector while making travel more affordable.
- Education Services: Many education-related services classified under essential goods and services will continue at the 5% slab, keeping costs low for students and parents.
In short, daily essentials, mid-range goods, and services like healthcare and travel will become more affordable, helping boost household consumption. The only segment facing higher costs will be luxury and sin goods, which fall under the new 40% slab.
State Concerns Over Revenue
Despite broad support, some states—such as Punjab, Kerala, Karnataka, and Jharkhand—have raised concerns over revenue losses. They have demanded clarity on compensation mechanisms, warning that cuts in collections could affect social welfare and development programs.
Officials, however, pointed out that previous GST rate rationalisations initially caused a dip in revenue, but collections rebounded strongly over time. The Centre has assured states of discussions on support measures if shortfalls persist.
Industry Impact
- Textiles, Chemicals, and Pharma: These sectors will benefit from faster GST refunds, addressing the inverted duty structure that has hurt working capital.
- MSMEs: Reduced compliance complexity and faster onboarding will allow smaller businesses to integrate more smoothly into the GST system.
- Consumption-Driven Sectors: Lower prices in FMCG, consumer durables, and hospitality are expected to give a festive boost to demand.
The Road Ahead
The dual-rate GST system marks a turning point in India’s tax policy. While short-term revenue concerns remain, experts believe the reform will spur demand, improve compliance, and strengthen economic growth in the long run.
With the festive season around the corner, the timing of the rollout is expected to give an additional push to consumption, particularly in middle-class households.
