The central government has proposed major reforms to the Goods and Services Tax (GST) system, aiming to simplify the tax structure and reduce the burden on consumers. According to official sources, the new framework will feature two main GST rates — 5% for essential goods and 18% for most other items. Additionally, luxury and harmful goods such as alcohol and tobacco will attract a special 40% tax.
Under the proposal, nearly 99% of products currently in the 12% slab will move to the 5% category, while around 90% of items in the 28% slab will shift to the 18% category. The current GST structure has 0% tax on essential food items, 5% on daily-use goods, 12% on standard items, 18% on electronics and services, and 28% on luxury or harmful products. In the new system, the 12% and 28% slabs will be removed entirely.
Currently, the 18% slab contributes the largest share (65%) of GST revenue, followed by 28% luxury/harmful goods (11%), 12% slab items (5%), and 5% daily essentials (7%). The government expects that lower rates will boost consumption, compensating for any short-term revenue loss. While the new plan proposes 40% GST on tobacco products, the total tax burden will remain at the existing level of 88%. Petroleum products will remain outside the GST framework, with existing taxes continuing. Labour-intensive and export-oriented sectors like diamonds and precious stones will retain their current tax rates.
The proposal also indicates that online gaming could be classified as a ‘harmful activity,’ attracting the highest tax rate. Sectors such as textiles, fertilisers, renewable energy, automobiles, handicrafts, agriculture, healthcare, and insurance are expected to benefit the most from the reforms.
Prime Minister Narendra Modi announced from the Red Fort on the 79th Independence Day that GST 2.0 reforms will be implemented by Diwali, promising significant relief for small businesses. The finance ministry stated that the proposal shared with the Group of Ministers is based on three pillars — structural reforms, rationalisation of tax rates, and ease of living — with the aim of reducing taxes on essential and aspirational goods.
