Summary of GST Council Decisions: 3rd September 2025
The 56th GST Council meeting, led by Finance Minister Nirmala Sitharaman, approved sweeping rationalisation of India’s Goods and Services Tax (GST) that will:
1. Consolidate the existing four-tier structure (5%, 12%, 18%, 28%) into two principal slabs: 5% (merit/lower-rate) and 18% (standard-rate).
2. Establish a 40% “sin/luxury” rate for specific high-end or potentially harmful goods, including tobacco, pan masala, cigarettes, aerated sugary beverages, and premium vehicles.
3. Exempt individual health and life insurance policies entirely from GST.
4. Move many essential goods—hair oil, soap, toothpaste, shampoo, packaged foods, paratha, flavoured milk, butter, ghee, juices—into the lower 5% slab or exempt them.
5. Reduce taxes on vehicle parts and auto components, including small cars and motorcycles, to 18%, enhancing sector competitiveness.
6. Streamline compliance—faster registration, risk-based provisional refunds, and operationalisation of the GST Appellate Tribunal (GSTAT).
The above reforms are proposed to be implemented from 22 September 2025, coinciding with Navratri. However, formal notifications under the CGST Act and allied laws are awaited
1. Persistent Challenges Leading to Reform
Prior to GST 2.0, India grappled with:
1.1. Complexity of multiple slabs, leading to frequent classification disputes and compliance burdens—for example, popcorn taxed variably at 5%, 12%, and 18%.
1.2. Items like flavoured milk and vehicle parts being taxed at higher rates, eroding affordability and creating input-credit distortions.
1.3. Compliance inefficiencies and litigation risk due to opaque classification.
1.4. Global trade headwinds, notably U.S. tariff escalations, pressuring exporters and demanding internal fiscal mitigation.
2. Impact on GST Revenue
2.1. Projected revenue loss: ₹48,000 crore annually (Revenue Secretary), with global estimates between ₹85,000–₹110,000 crore.
2.2. Losses may reach 0.3–0.4% of GDP, though revenue buoyancy is expected from consumption revival.
2.3. Opposition-ruled states anticipate ₹1.5–2 lakh crore annual shortfalls; Centre promises calibrated compensation.
2.4. August 2025 collections: ₹1.86 lakh crore, showing 6.5% YoY growth.
3. Rationalisation and Working Capital Constraints
One of the silent but significant gains of GST 2.0 is the easing of working capital blockages. Under the earlier structure, businesses paying tax at 18% or 28% on inputs but selling goods taxed at 5% or 12% often faced inverted duty structures. This resulted in accumulation of Input Tax Credit (ITC) and delayed refunds, directly straining cash flows.
By collapsing rates into 5% and 18%, the reform reduces mismatches, cuts refund dependency, and allows businesses—particularly in textiles, footwear, and FMCG sectors—to retain liquidity in operations rather than parking it with the exchequer. The Council’s commitment to risk-based refunds further ensures that refunds will be timely, reinforcing cash-flow neutrality.
4. Trade-War Angle
4.1. Rationalisation is also a strategic response to global trade pressures, particularly U.S. tariffs on Indian exports.
4.2. Lower tax on consumer goods and auto parts enhances competitiveness in export markets.
4.3. Faster refunds and reduced inversion improve exporters’ cost efficiency, allowing them to price goods more competitively abroad.
5. Industry-Wise Proposed Impact Table
|
Sector
|
Pre-Reform Issues
|
Post-GST 2.0 Benefits
|
Working Capital Relief
|
|
FMCG
|
High tax on soaps, shampoos, toothpaste (18%); litigation on food classification.
|
Shifted to 5% rate; clarity on essentials like paratha, flavoured milk.
|
Lower ITC blockage, reduced litigation risk, faster turnover of cash.
|
|
Automobile & Auto Parts
|
Vehicle parts taxed at 28%; inputs > outputs led to credit accumulation.
|
Parts rationalised to 18%; small cars/motorcycles cheaper.
|
Reduced inversion; liquidity unlocked for OEMs and suppliers.
|
|
Textiles & Footwear
|
Chronic inverted duty structure (inputs 12–18%, output 5%).
|
Harmonised to 5% or 18% across categories.
|
Substantial reduction in refund dependency; improved cash flow.
|
|
Healthcare & Insurance
|
18% tax on life and health insurance premiums.
|
0% GST on all individual life/health policies.
|
Consumers save directly; insurers avoid tax-linked compliance disputes.
|
|
Pharma & Lifesaving Drugs
|
12% on most drugs, delays in refund of inverted duty.
|
0%–5% GST on 33 lifesaving drugs and related medicines.
|
Immediate relief in pricing, better liquidity for manufacturers.
|
|
Export-Oriented Units
|
High ITC accumulation; refund delays aggravated by multiple slabs.
|
Simplified structure reduces mismatches.
|
Liquidity conserved; faster refund cycle supports competitiveness.
|
The 56th GST Council’s decisions mark a shift from complexity to clarity. By simplifying rates, reducing classification disputes, easing working capital pressures, and aligning with global trade realities, GST 2.0 balances revenue risks with structural reform. The policy seeks to safeguard consumption, protect exporters, and strengthen fiscal equity, setting the stage for a more predictable and efficient indirect tax regime.
Important Link- https://www.pib.gov.in/PressReleasePage.aspx?PRID=2163555
Some Major changes proposed are as below -
|
HSN/Chapter
|
Description
|
Old Rate
|
New Rate
|
|
61
|
Apparel & clothing accessories, knitted/crocheted (value > ₹2500/piece)
|
12%
|
18%
|
|
62
|
Apparel & clothing accessories, not knitted/crocheted (value > ₹2500/piece)
|
12%
|
18%
|
|
63
|
Other made-up textile articles (value > ₹2500/piece)
|
12%
|
18%
|
|
48
|
Paper & paperboard (writing, printing, kraft, greaseproof, glassine, composite, coated, corrugated, etc.)
|
12%
|
18%
|
|
47
|
Chemical wood pulp (dissolving grades excluded)
|
12%
|
18%
|
|
9404
|
Quilted textile products (value > ₹2500/piece)
|
12%
|
18%
|
|
9404
|
Cotton quilts (value > ₹2500)
|
12%
|
18%
|
|
33074100
|
Odoriferous preparations (burning products)
|
12%
|
18%
|
|
9963
|
Supply of “hotel accommodation” having value of supply of a unit of
accommodation less than or equal to seven thousand five hundred rupees per unit per day
or equivalent
|
12% with ITC
|
5% without ITC
|
|
9018
|
Instruments and appliances used in medical, surgical, dental or
veterinary sciences, including scintigraphic apparatus, other
electro-medical apparatus and sight-testing instruments
|
12%
|
5%
|
|
9988
|
Majority Job Work
|
12% with ITC
|
5% without ITC
|
|
9988
|
Supply of job-work not elsewhere covered (residual entry)
|
12% with ITC
|
18% with ITC
|
|
5910
|
Transmission or conveyor belts or belting, of textile material, whether or not impregnated, coated, covered or laminated with plastics, or reinforced with metal or other
material
|
12%
|
5%
|
|
84, 85 or 94
|
renewable energy devices and parts for their manufacture
|
12%
|
5%
|
|
9027
|
Instruments and apparatus for medical, surgical, dental or
veterinary uses for physical or chemical analysis
|
18%
|
5%
|
|
8703
|
Petrol, Liquefied petroleum gases (LPG) or compressed
natural gas (CNG) driven motor vehicles of engine capacity
not exceeding 1200cc and of length not exceeding 4000
mm.
|
28%
|
18%
|
|
8703
|
Diesel driven motor vehicles of engine capacity not
exceeding 1500 cc and of length not exceeding 4000 mm.
|
28%
|
18%
|
|
8703
|
Motor cars and other motor vehicles principally designed for
the transport of persons (other than those of heading 8702),
including station wagons and racing cars, other than those
mentioned at Sr. Nos.4,5,6,7,8 and 9 of above table [wherein
28% to 18% is mentioned ]
|
28%
|
40%
|