Essentials Like Milk and Breads Exempted; Cuts Rates on Small Cars and Medicines; Luxury Goods, Hybrids, and Sin Items Pushed Into Steep 40% Bracket
The 56th meeting of the Goods and Services Tax (GST) Council, chaired by Finance Minister Nirmala Sitharaman and comprising state finance ministers, concluded on Wednesday with landmark decisions aimed at simplifying the GST regime and providing relief to consumers.
The Council approved the long-awaited move to a simplified two-slab GST structure of 5% and 18%, replacing the current four-tier system of 5%, 12%, 18% and 28%. A special 40% slab has also been introduced for “sin goods” such as tobacco, luxury cars, online gaming, and sugar-sweetened beverages. The new structure will take effect from 22 September 2025.
FM Sitharaman said the restructuring aimed to bring relief to the common man and middle class by cutting taxes on essential items and correcting distortions that had plagued several sectors. “For common man and middle-class items, there is a complete reduction,” she said after the meeting, adding that the changes reflect the government’s focus on affordability.
Daily Essentials Get Cheaper
Several mass-consumption goods will see sharp tax cuts. Items such as hair oil, toilet soap, shampoos, toothbrushes, toothpaste, bicycles, tableware, and kitchenware have been shifted to the 5% slab from higher brackets.
In a significant relief to food inflation, essential items like namkeen, sauces, pasta, noodles, chocolates, coffee, butter, ghee, preserved meat, cornflakes, and snacks have all moved down to the 5% rate.
Daily staples, including ultra-high temperature (UHT) milk, paneer, chena, and all Indian breads (roti, paratha, etc.), will now be tax-free.
Relief on Consumer Durables
In a major shift, air conditioners, dishwashers, television sets of all sizes, and motorcycles with engines up to 350cc will now attract 18% GST instead of 28%. Analysts expect prices of these products to drop by 8% to 10%, supporting demand in the upcoming festive season.
The Finance Minister also announced tax cuts on agriculture and renewable energy equipment. “Agricultural machines such as tractors, threshers, balers, and composting equipment are all coming down from 12% to 5%. Similarly, renewable energy devices such as wind turbines, biogas plants, and solar panels are moving to the 5% slab,” she said.
Medicines, Healthcare and Insurance: GST Exemptions
One of the most significant changes is in the health sector. GST on 33 life-saving drugs used for treating cancer, rare diseases, and chronic illnesses has been reduced to zero. Several other medicines have been moved from 12% to 5%.
Spectacles and vision-correcting goggles will now attract just 5% GST, down from 28%.
On insurance, Sitharaman announced full GST exemption on all individual life and health insurance policies, including term life, ULIPs, endowment plans, family floaters, and senior citizen policies.
“Removing GST from health and life insurance will directly reduce premiums, making insurance more affordable and accessible,” said Akash Parwal, CEO, Square Insurance. “Currently, the 18% GST adds about ₹4,500 to a ₹25,000 health policy, discouraging many middle-class households. This reform can significantly boost insurance penetration.”
Automobiles: Relief for Small Cars, Higher Tax for Hybrids and Luxury Vehicles
The sharpest rate reduction came for small cars, which remain the backbone of India’s passenger vehicle market. Petrol, CNG, and LPG cars with engines up to 1200cc, and diesel cars up to 1500cc within the four-metre length limit, will now face 18% GST instead of 28%.
This cut is expected to bring down ex-showroom prices by 5% to 7% for popular models like Maruti Swift, Hyundai i10, Tata Punch, and compact SUVs such as Brezza and Venue.
However, the government has introduced a tougher regime for hybrids and larger vehicles. Cars with engines above 1200cc (petrol) or 1500cc (diesel), or exceeding four metres in length, and motorcycles above 350cc will move to the new 40% slab.
This means models such as Toyota Innova Hycross Hybrid and Honda City e:HEV will become more expensive, disappointing automakers who had hoped hybrids would get tax incentives as a bridge to electric vehicles.
Pure electric vehicles (EVs) will continue to attract just 5% GST, signalling a clear policy push towards direct EV adoption.
Agriculture, Textiles and Renewable Energy: Support for Key Sectors
Farm and rural sectors will benefit from tax cuts on tractors, agricultural machinery, threshers, composting machines, bio-pesticides, and natural menthol, all reduced from 12% to 5%.
The long-pending inverted duty issue in textiles has also been addressed: man-made fibre and yarn will now be taxed at 5% instead of 18% and 12%, respectively, providing relief to the struggling textile industry.
The renewable energy sector received further support, with solar panels, wind turbines, waste-to-energy plants, biogas plants, and solar water heaters now in the 5% slab.
At the other end of the spectrum, the Council imposed a 40% GST on sin and luxury goods like sugar-sweetened beverages, energy drinks, and paan masala. Cigarettes will face 40% plus an additional 12% cess in some cases. Similarly, lottery, casino services, and online gaming will also be taxed at 40%.
“That special rate of 40% has also been proposed and cleared, and it will apply only to paan masala, cigarettes, gutka, and other tobacco products such as chewing tobacco, products like zarda, unmanufactured tobacco, and bidi,” Sitharaman clarified during the meeting.
Mixed Reactions from States
Punjab Finance Minister Harpal Singh Cheema confirmed that while the new structure was approved, Punjab sought a higher compensation cess to offset revenue losses. West Bengal’s Chandrima Bhattacharya warned that states could face a combined ₹47,700 crore revenue shortfall.
Jammu & Kashmir Chief Minister Omar Abdullah said the reforms could reduce his state’s revenue by 10% to 12%, deepening its fiscal crisis in the aftermath of the Pahalgam terror attack. Jharkhand Finance Minister Radhakrishna Kishore projected an annual revenue loss of ₹2,000 crore in sectors such as automobiles and cement, urging the Centre to compensate for the shortfall.
In contrast, Andhra Pradesh’s P. Keshav hailed the reforms as being in the “best interest of the poorest of the poor,” echoing Prime Minister Narendra Modi’s Independence Day speech where he described the overhaul as a “Diwali gift” to citizens.
PM Hails the Decision
PM Modi applauded the decision, writing on X that the reforms would “benefit the common man, farmers, MSMEs, middle class, women, and youth,” while making GST simpler and ensuring ease of doing business.
He posted:
“During my Independence Day Speech, I had spoken about our intention to bring next-generation reforms in GST. The Union Government had prepared a detailed proposal for broad-based GST rate rationalisation and process reforms, aimed at ease of living for the common man and strengthening the economy. Glad to state that the GST Council, comprising the Union and the States, has collectively agreed to the proposals submitted by the Union Government on GST rate cuts and reforms, which will benefit the common man, farmers, MSMEs, middle-class, women, and youth. These wide-ranging reforms will improve lives and ensure ease of doing business for all, especially small traders and businesses.”
Former NITI Aayog CEO Amitabh Kant called it a “landmark reform,” praising the reduction to two slabs as “bold and visionary,” capable of boosting consumption, fuelling investment, and generating jobs.
Economists see the rationalisation as growth-supportive. SBI Research estimates that the weighted average GST rate will fall to 9.5%, lowering retail inflation by 20–25 basis points and potentially adding 60 basis points to GDP growth. However, MUFG cautioned that India still faces external headwinds, with US tariffs potentially shaving off up to 1 percentage point from growth.
With the new two-slab structure, rate cuts on essentials, and clarity on insurance, textiles, agriculture, and automobiles, the Council’s decisions mark what many are calling GST 2.0.
Next-Gen GST Reforms: LG Sinha
Srinagar, Sep 4: Lieutenant Governor, Manoj Sinha expressed gratitude to the Prime Minister Narendra Modi and Finance Minister Nirmala Sitharaman for the Next-Gen GST Reforms.
In a post on X, the Lieutenant Governor said: “Heartfelt thanks to PM Narendra Modi ji and FM Nirmala Sitharaman Ji for Next-Gen GST Reforms. It’ll empower MSMEs and farmers and accelerate manufacturing. It’ll improve ease of living and ease of doing business while further strengthening our fastest growing economy.” LG Manoj Sinha expressed gratitude to the Prime Minister Narendra Modi and Finance Minister Nirmala Sitharaman for the Next-Gen GST Reforms.
In a post on X, the Lieutenant Governor, according to KNO said: “Heartfelt thanks to PM Narendra Modi ji and FM Nirmala Sitharaman Ji for Next-Gen GST Reforms. It’ll empower MSMEs and farmers and accelerate manufacturing. It’ll improve ease of living and ease of doing business while further strengthening our fastest growing economy.”
