Explore key rate adjustments from the 56th GST Council meeting. Understand how rationalisation impacts Indian businesses and consumers.
The Goods and Services Tax (GST) was introduced in India with the primary goal of simplifying the country’s complex indirect tax landscape, aiming to establish a unified national market. However, the implementation of GST, while addressing some issues, also introduced new complexities. This article explores the concept of GST rate rationalisation, highlighting its necessity and the challenges the GST Council encounters in refining these rates. This analysis details the impact of recent and proposed adjustments to the GST framework.
Key outcomes from the 56th GST Council meeting, held on September 3, 2025, included a significant restructuring of GST rates. The previous four-slab system (5%, 12%, 18%, 28%) was streamlined into a simpler framework:
- Standard rate: 18% – Applied to a majority of goods and services.
- Merit rate: 5% – Designated for essential items and priority sectors.
- Demerit rate: 40% – Specifically for sin goods and luxury products.
Additional noteworthy changes included:
- Individual health and life insurance services became GST-exempt.
- Dairy products, 33 essential medications, and educational necessities were moved to a Nil rate.
- Daily essentials, agricultural goods, and healthcare equipment now attract a 5% GST.
- Electronic appliances, small cars, and motorcycles (up to 350cc) were reduced to 18% GST.
- GST on sin goods, such as pan masala, aerated waters, and caffeinated/carbonated fruit beverages, was increased to 40%.
- Most of these GST rate adjustments are scheduled to take effect from September 22, 2025, with an exception for tobacco products.
Significant Changes from the 56th GST Council Meeting
The reforms introduced by the 56th GST Council meeting represent a comprehensive overhaul of GST rates since the tax’s inception. These changes are expected to significantly influence financial planning, cash flows, and competitive positioning across various sectors.
GST Rate Reductions
| Category | Items | From (%) | To (%) |
|---|---|---|---|
| Daily Essentials | Personal care items (hair oil, shampoo, toothpaste, soap, brushes, shaving cream) | 18 | 5 |
| Butter, ghee, cheese, and dairy spreads | 12 | 5 | |
| Pre-packaged savory snacks (namkeens, bhujia, mixtures) | 12 | 5 | |
| Utensils | 12 | 5 | |
| Baby feeding bottles, napkins, and clinical diapers | 12 | 5 | |
| Sewing machines and their parts | 12 | 5 | |
| Uplifting Farmers & Agriculture | Tractor tyres and parts | 18 | 5 |
| Tractors | 12 | 5 | |
| Specified 12 bio-pesticides and micro-nutrients | 12 | 5 | |
| Drip irrigation systems and sprinklers | 12 | 5 | |
| Agricultural, horticultural, or forestry machines (for soil preparation, cultivation, etc.) | 12 | 5 | |
| Healthcare Sector | Individual health and life insurance | 18 | Nil |
| Thermometers | 18 | 5 | |
| Medical-grade oxygen | 12 | 5 | |
| All diagnostic kits and reagents | 12 | 5 | |
| Glucometers and test strips | 12 | 5 | |
| Corrective spectacles | 12 | 5 | |
| 33 specified drugs and medicines (as per press release) | 12 | Nil | |
| Agalsidase Beta, Imiglucerase, and Eptacog alfa activated recombinant coagulation factor VIIa drugs | 5 | Nil | |
| Drugs like Faricimab, Pertuzumab, Fluticasone Furoate + Umeclidinium + Vilanterol FF/UMEC/VI, Ocrelizumab, and Brentuximab Vedotin | 12 | 5 | |
| Automobiles | Petrol and petrol hybrid, LPG, CNG cars (up to 1200cc & 4000mm length) | 28 | 18 |
| Diesel and diesel hybrid cars (up to 1500cc & 4000mm length) | 28 | 18 | |
| Three-wheelers | 28 | 18 | |
| Motorcycles (up to 350cc) | 28 | 18 | |
| Motor vehicles for goods transport | 28 | 18 | |
| Education | Maps, charts, and globes | 12 | Nil |
| Pencils, sharpeners, crayons, and pastels | 12 | Nil | |
| Exercise books and notebooks | 12 | Nil | |
| Erasers | 5 | Nil | |
| Electronic Appliances | Air conditioners | 28 | 18 |
| Televisions (above 32″, including LED & LCD TVs) | 28 | 18 | |
| Monitors and projectors | 28 | 18 | |
| Dishwashing machines | 28 | 18 |
GST Rate Increases
| Category | Item Description | From (%) | To (%) |
|---|---|---|---|
| Mining | Coal, lignite, peat | 5 | 18 |
| Sin goods | Tobacco/pan masala* | 28 | 40 |
| Aerated waters | 28 | 40 | |
| Caffeinated beverages | 28 | 40 | |
| Carbonated beverages of fruit drinks / with fruit juice | 28 | 40 | |
| Other non-alcoholic beverages | 18 | 40 | |
| Motor cars and larger hybrids (beyond small-car thresholds) | 28 | 40 | |
| Motorcycles exceeding 350cc | 28 | 40 | |
| Aircraft for personal use | 28 | 40 | |
| Yachts and vessels for pleasure/sports | 28 | 40 | |
| Smoking pipes and cigarette/cigar holders | 28 | 40 | |
| Revolvers & pistols | 28 | 40 | |
| Admission to casinos, race clubs, and sporting events like IPL | 28% with ITC | 40% with ITC | |
| Licensing of bookmakers by race clubs | 28% with ITC | 40% with ITC | |
| Specified actionable claims (betting, casinos, gambling, horse racing, lottery, online money gaming) | 28% with ITC | 40% with ITC | |
| Leasing/rental without operator of goods attracting 40% GST | 28% with ITC | 40% with ITC | |
| Paper sector | Dissolving-grade chemical wood pulp | 12 | 18 |
| Various papers/paperboards, excluding exercise-book paper | 12 | 18 | |
| Textiles | Apparel/Made-ups > Rs 2,500 per piece | 12 | 18 |
| Quilted/cotton quilts and quilted products more than Rs. 2,500 per piece | 12 | 18 |
*The changes for tobacco/pan masala will be effective later, pending the discharge of compensation cess obligations.
Existing GST Rate Structure
Currently, GST is applied across five slabs, including a 0% or nil tax rate. These slabs are 0% (Nil tax), 5%, 12%, 18%, and 28%. Essential commodities generally fall under the 0% and 5% tax brackets, while semi-essential items are taxed at 12% and 18%. Luxury goods incur the highest GST rate of 28%.
The Imperative for GST Rate Rationalisation
GST rate rationalisation is crucial for achieving the original objectives of introducing GST in India, driven by several factors:
- Simplifying the Tax Structure: Despite being simpler than the pre-GST indirect tax regime, the initial four-slab GST structure (excluding 0%) still offers considerable scope for simplification, especially when compared to global practices of one or two tax slabs.
- Aligning with Consumption Patterns: As a consumption-based tax system, GST rates require continuous review and adjustment based on evolving consumption trends to maintain relevance with changing micro and macroeconomic conditions.
- Alleviating Consumer Tax Burden: In a democratic nation like India, both central and state governments aim to manage price inflation. GST rate adjustments help reduce the tax burden on essential goods.
- Reducing Compliance for Businesses: Multiple tax slabs for similar products and ambiguities in interpreting tax implications can increase compliance and audit burdens for manufacturers and traders, leading to higher operational costs.
- Enhancing Taxpayer Acceptance: A simplified tax structure generally improves taxpayer willingness to accept the system and encourages voluntary tax payments, which is vital for GST’s long-term success in India.
Key Proposals for GST Rate Refinement
Various industry associations, trade bodies, and consumer protection groups have put forth several proposals for refining India’s GST rates. Some notable suggestions include:
- Substantially reducing or exempting individual health insurance premiums from GST.
- Rationalising the tax disparity between Electric Vehicles (EVs), Hybrid, and Flex-fuel cars.
- Consolidating the 12% and 18% slabs into a single median rate, such as 15%, to reduce the number of tax slabs to three.
- Addressing inconsistencies where items in similar categories face different tax implications (e.g., loose jaggery taxed at 0% while packed jaggery incurs 5% GST).
- Gradually transitioning to a single-slab GST system, aligning with international best practices.
Anticipated Effects of GST Rate Rationalisation
Effective and timely implementation of GST rate rationalisation is projected to yield several positive outcomes:
- Boosting the ‘ease of doing business’ for manufacturers and traders nationwide.
- Reinforcing India’s identity as ‘one nation, one market’ by removing inter-state trade barriers.
- Decreasing compliance burdens and costs for businesses.
- Fostering greater voluntary acceptance of GST among taxpayers.
- Improving GST revenue collection for government coffers.
The Intricacy of GST Rate Rationalisation
Despite high expectations from meetings like the 53rd GST Council session on June 22, 2024, conclusive decisions on GST rate rationalisation remain elusive due to several challenges:
- Consensus Building in a Diverse Nation: India’s diversity in consumption patterns across states, coupled with states holding two-thirds of the voting power in the GST Council, makes achieving consensus difficult, especially amidst political differences. For instance, proposals to bring petroleum products under GST often face opposition from states concerned about revenue loss.
- Balancing Revenue Collection: Any reduction in GST rates for some items necessitates a compensatory increase for others to maintain tax collection levels. With most luxury goods already at the highest rates, options are limited, and changes could also fuel inflation.
- Managing Economic Impact: Merging tax slabs or making broad structural changes can disproportionately affect specific consumer segments or contribute to inflation. For example, merging 12% and 18% slabs to 15% would increase the tax burden on items previously in the 12% bracket. Balancing such impacts is a complex task.
- Inter-Agency Coordination: Significant shifts in the GST tax structure or slab mergers demand coordinated efforts from multiple government agencies for successful implementation, a process that is both time-consuming and resource-intensive.
Government Efforts and Stakeholder Consultations
The 54th GST Council Meeting, held on September 9, 2024, in New Delhi, received status reports from the Group of Ministers (GoM) on rate rationalisation. These reports will guide future discussions in upcoming council meetings. The GST Council did, however, recommend a few immediate rate changes, including those for extruded/expanded savoury food products, specific cancer drugs, and car and motorcycle seats.
