New Delhi: In a landmark decision aimed at simplifying India’s indirect tax regime, the Goods and Services Tax (GST) Council has collapsed the country’s complex slab structure into just two broad categories 5% and 18%. A steep 40% sin tax will be levied on super luxury items and harmful products. The new system, described as a “next-generation reform,” will come into force on September 22, 2025.
Announcing the decision, Union Finance Minister Nirmala Sitharaman said the reforms were designed with “a multi-sectoral and multi-thematic focus,” ensuring both ease of living for ordinary citizens and ease of doing business for traders and industries. According to government projections, the reform will leave consumers with higher disposable income, potentially injecting ₹48,000 crore back into the economy and giving consumption a fresh boost.
The biggest gains will be felt in sectors tied directly to households and public welfare. Essential items, medicines, farm goods, and green energy products have been placed under the 5% slab. Critical healthcare needs have been given special attention, with 33 life-saving drugs, including anti-cancer medicines, being exempted from any tax. Medical items of daily necessity such as thermometers and glucometers will also attract just 5%.
Education too has been made more affordable. Notebooks, pencils, erasers, crayons, and exercise books, which previously faced a 12% tax, will now fall under the 5% bracket. Farmers also benefit, with agricultural implements shifting from 12% to 5%, providing cost relief for rural India.
Daily-use household products such as soaps, shampoos, hair oils, sauces, pasta, and dairy-based snacks will all attract 5% GST, while staple foods like bread, milk, and paneer remain tax-free.
Aspirational consumer goods will also see a price drop. Items such as televisions, air conditioners, and motorbikes under 350 cc have been moved to the 18% slab from the earlier 28%. Small cars petrol vehicles up to 1200 cc and diesel vehicles up to 1500 cc will also be taxed at 18%. The government expects these adjustments to benefit middle-class families, encouraging greater consumption and mobility.
On the other hand, the Council has chosen to tighten taxation on luxury and harmful products. A 40% sin tax will now apply to tobacco and tobacco-related products, carbonated drinks, large cars, and motorbikes above 350 cc. The intention is twofold: to curb consumption of socially harmful goods and to generate additional revenue from the highest income groups.
India’s GST system has so far operated on four slabs 5%, 12%, 18%, and 28%. Over the past eight years, data revealed that the 18% slab alone accounted for nearly 67% of total GST revenue, while the 12% slab contributed just 5%. With such disparities, experts and policymakers agreed that a simplification was necessary. By eliminating the 12% category and rationalizing the 28% bracket, the Council expects not only smoother compliance but also reduced disputes and confusion about applicable rates.
Together, the 5% and 18% slabs already accounted for 74% of total GST collections in 2020–21, which stood at ₹11.37 lakh crore. This made them the natural choice for consolidation.
Prime Minister Narendra Modi welcomed the reform on social media platform X, describing it as the most comprehensive clean-up of GST since its introduction in 2017. “During my Independence Day speech, I spoke about next-generation GST reforms. Today, I am glad the Council, with participation from all states, has collectively agreed to this landmark decision. The reforms will improve lives and empower small businesses,” he wrote.
The Goods and Services Tax, rolled out on July 1, 2017, was launched at a midnight ceremony in Parliament by PM Modi and then-President Pranab Mukherjee. Heralded as “one nation, one tax, one market,” the GST was expected to replace a maze of indirect taxes and unify the market.
However, the multiple slabs, quarterly digital filings, and frequent classification disputes drew criticism, especially from small traders and micro enterprises who struggled to adapt. Despite subsequent adjustments, India retained one of the world’s most complex GST systems.
The September 22 reform is therefore being hailed as a historic clean-up one that could shape India’s economic future by ensuring clarity, fairness, and growth.