21/04/2026
In a significant reform announced during his Independence Day address, the Prime Minister declared that the long-awaited rationalisation of Goods and Services Tax (GST) rates could be implemented by Diwali in October 2025. The overhaul is expected to simplify India’s complex indirect tax regime and provide relief to consumers, while also attempting to boost demand in key sectors.
The proposed reform will streamline the existing four-tier GST structure of 5%, 12%, 18%, and 28% into a two-tier framework with only two standard rates—5% (merit rate) and 18% (standard rate). Special higher rates will continue only for a select group of goods. In addition, cess collections will remain applicable on sin goods, primarily for health and clean energy funding.
At present, nearly 70–75% of GST revenue is collected through the 18% slab, while 13–15% comes from the 28% slab. In FY25, total GST collections amounted to ₹22.08 trillion, of which cess contributed ₹1.5 trillion. The 18% slab generated ₹15 trillion, and the 28% slab contributed ₹2.9 trillion. Under the new structure, most goods currently in the 28% category will move to 18%, except for certain items like aerated drinks, luxury cars, pan, tobacco, and cigarettes, which will shift to a new 40% slab with cess continuing. Revenue from the 12% slab, which contributed ₹1.2 trillion in FY25, will mostly move to the 5% category, implying a revenue impact of nearly ₹0.7 trillion.
The draft plan suggests that several mass-market and aspirational goods could become cheaper in the near future. Essential food items such as ghee, butter, packaged foods, fruit juices, and packaged coconut water—currently taxed at 12%—may move to the lower 5% slab. Similarly, footwear and apparel priced below ₹1,000, along with GST on sub-₹7,500 ARR (Average Room Rate) hospitality inventory, are expected to shift from 12% to 5%.
The automobile sector could see significant changes as well. Small cars and two-wheelers under 250cc, which currently attract 28% GST, may be taxed at 18%. This move is expected to revive demand in these categories, which have witnessed sluggish growth in recent years. Larger cars, currently facing nearly 50% taxation, may be taxed at 40% with additional levies to keep the overall incidence between 43–50%.
Other goods and services may also benefit from reductions. Items such as air conditioners, dishwashers, televisions up to 32 inches, and cement—currently taxed at 28%—are likely to be shifted to the 18% slab. For instance, a reduction in cement GST would help lower construction and housing costs. Insurance premiums, both health and life, may also see rate cuts, potentially moving down from the current 18% to 5% or even zero, providing relief to households.
However, these tax reductions come at a fiscal cost. Analysts estimate that the reforms could result in a revenue loss equivalent to 0.2%–0.4% of GDP annually. For FY26 alone, the shortfall of ₹430 billion (0.12% of GDP) is expected to be offset by surplus cess collections and a higher-than-budgeted dividend transfer from the Reserve Bank of India.
It is expected that cheaper goods and services will ultimately support demand recovery. Nearly 6-8% of the Consumer Price Index (CPI) basket is expected to see a price reduction of around 6–8%, which could bring down headline CPI inflation by approximately 50 basis points, particularly in core goods. This, in turn, could bolster household consumption and support India’s broader growth trajectory.
If rolled out as planned, the reform would mark the most comprehensive restructuring of GST since its introduction, balancing consumer relief, industry competitiveness, and fiscal prudence.