GST 2.0: Overhaul of India’s Goods and Services Tax (GST) system

GST 2.0 is the latest overhaul of India’s Goods and Services Tax (GST) system, which introduces a simplified structure featuring just two principal tax slabs and a special high tax slab for select goods, effective from September 22, 2025.

India’s “GST 2.0” marks a major turning point in the country’s indirect tax regime, bringing welcome simplification, lower taxes on essentials, and new focus on economic growth. Effective from September 22, 2025, the reforms rewrite the tax landscape, aiming to make compliance easier for both businesses and consumers.

 Two-Slab Structure for Simplicity

 GST 2.0 replaces the old four-rate system (5%, 12%, 18%, 28%) with just two principal slab rates—5% and 18%—plus a special high rate of 40% focused on luxury and sin goods. This is designed to end confusion and minimize disputes over product classification, bringing uniformity and predictability to the market.

 Cheaper Essentials, More Exemptions

 Daily-use items like hair oil, soap, shampoo, toothpaste, and bicycles will now attract only 5% GST, making them more affordable for the average household. Essential foods such as milk, paneer, and all types of Indian bread are totally exempt from GST, down from 5% formerly. Packaged foods like namkeen, sauces, and butter also become cheaper due to a significant rate reduction.

Healthcare has seen sweeping changes: 33 life-saving medicines are now free of GST (previously 12%), while spectacles and corrective devices have dropped from 28% to 5%. Crucially, all individual health and life insurance policies—including family and senior citizen coverage—are now GST-exempt.

 Focus on Growth and Compliance

 These reforms have a clear economic intent: boost consumption, support MSMEs and daily consumers, and increase household disposable income. Automated registration and refund processes are part of GST 2.0’s vision, helping businesses, especially small enterprises, by easing operational burdens and cutting costs.

 Experts estimate the changes could trigger around ₹1.98 lakh crore in additional consumption, mitigating small drops in government revenue while supporting broad-based growth. Lower insurance costs promote greater coverage across the population, fulfilling long-standing demands for affordable protection.

 Higher Taxes for Luxury and Sin Goods

 While essentials will get more affordable, GST 2.0 introduces a 40% “super-high” rate for luxury and demerit items—like premium motorcycles, yachts, helicopters, and adult beverages. Tobacco remains at 28% until state compensation issues are settled. This structure reflects a “tax as deterrent” strategy targeting superfluous and harmful consumption, rather than regular households.

 Resolving Old Bottlenecks

 GST 2.0 also resolves longstanding issues: inverted duty structures, disputes over product classification, and blocked working capital due to refund delays. Streamlined audits and improved coordination between state and central tax authorities are expected to minimize repeated scrutiny for the same issues.

Major Changes in GST 2.0

1. Two-Slab Structure: The new GST regime will have two main slabs – 5% for merit and essential goods, and 18% as the standard rate for most other items.
2. Special 40% Slab: A new 40% rate is now introduced for super luxury, sin, and demerit goods, like aerated water, carbonated beverages, motorcycles above 350cc, helicopters, and yachts.
3. Slab Streamlining: The previous system of four main slabs (5%, 12%, 18%, 28%) is replaced, making compliance easier and reducing classification disputes.

Goods Affected

1. Items now taxed at 40%: Includes luxury motorcycles (>350cc), certain beverages, helicopters, and yachts.
2. Essential Goods Cheaper: Hair oil, toilet soaps, shampoos, toothbrushes, bicycles now face just 5% GST (down from 18%), while basic food items like milk, paneer, and Indian breads are fully exempted (zero tax). Healthcare has also seen a reduction, with GST removed on 33 life-saving medicines.
3. Beauty and Well-Being Services: Salons, gyms, yoga centres now attract 5% GST, down from 18%.

Impact and Goals

1. The reform aims for simplification, fewer slabs, and ease of business, with automated refunds and registration processes.
2. Expected to reduce the tax burden on common people and increase household disposable incomes, potentially boosting consumption by approximately 1.6% of GDP.
3. Revenue losses from rate cuts will be offset by higher consumption, supporting economic growth.
4. Exemptions for individual life and health insurance policies have been added, further reducing the financial burden for many citizens.

Debates and Analysis

1. Some experts urge caution against expanding the 40% slab, suggesting future reforms should aim for a single nationwide rate to avoid complexity and market distortions.
2. Overall, GST 2.0 is seen as a major structural reform intended to rationalize tax rates, correct inverted duty structures, and make the tax system more predictable and growth-friendly.

 

Summary Table: GST 2.0 Slab Highlights

Slab Rate	Key Goods/Services	Previous Rate	New Rate
5%	Daily essentials, some consumer goods	Up to 18%	5%
18%	Standard rate for most items	12%, 18%, 28%	18%
40%	Sin & luxury goods (see above)	28%	40%
0%	Basic foods, select healthcare	5%-12%	0%

 

Here is a table comparing the old GST rates with the new GST 2.0 rates for key commodities, highlighting major changes that will take effect from September 22, 2025. This table summarizes the significant rate reductions for essential items, sharp increases for luxury and "sin" goods, and key exemptions introduced in GST 2.0.

 

Commodity	Old GST Rate	New GST 2.0 Rate
Hair oil	18%	5%
Shampoo	18%	5%
Toothbrush, toothpaste	18%	5%
Toilet soap, soap bars	18%	5%
Bicycles	18%	5%
Indian breads (roti, paratha, etc.)	5%	0%
Milk, paneer	5%	0%
Butter, ghee	12%	5%
Packaged namkeen, sauces	12–18%	5%
TV (above 32 inch)	28%	18%
Dishwashing machines	28%	18%
Small cars, motorcycles ≤350cc	28%	18%
Luxury motorcycles >350cc	28%	40%
Helicopters, yachts	28%	40%
Aerated, caffeinated drinks	28%	40%
Tobacco, cigarettes, gutkha	28% + cess	28% + cess (no change)
Life-saving medicines	12%	0%
Spectacles, vision correction	28%	5%
Agricultural machinery, tractors	12%	5%

 

Luxury Items Under GST 2.0

 

GST 2.0 sets a new 40% GST rate for luxury goods to discourage excessive spending and generate higher revenue from ultra-premium consumption. Key items in this category include:

1. Luxury Cars: Vehicles longer than 4 metres with engines above 1,200cc (petrol) or 1,500cc (diesel), and all utility vehicles (SUV, MPV, etc.) meeting these specifications now attract 40% GST (up from 28% + cess).
2. Motorcycles above 350cc: Premium and super bikes also move to the 40% rate.
3. Helicopters, Yachts: Personal helicopters and yachts are taxed at the highest slab.
4. Aerated, Carbonated, and Caffeinated Drinks: All such beverages attract 40% GST under GST 2.0.

 

This move is expected to drive growth in sub-4m cars and regular motorcycles, which will benefit from rate reductions, while ultra-premium segments face cost increases.

 

Tobacco and Sin Products

 

Tobacco and related products remain under the older 28% GST rate plus compensation cess until pending compensation payments are settled. Items such as:

 

1. Cigarettes, Beedi, Gutkha, Pan Masala: These will continue under the previous regime, not moving into the 40% slab immediately.
2. Lottery, Betting, Gambling, Casinos, Horse Racing, Online Gaming: These actionable claims are now specifically covered under the 40% slab.

 

The government’s strategy is to maintain high taxes on tobacco and sin goods, but further rationalization is expected once financial transitions with the states are completed.

These changes reflect both a public health motivation and a revenue-generation strategy, aligning fiscal policy with social welfare objectives under GST 2.0.

 

Under GST 2.0, the following luxury items specifically qualify for the new 40% GST slab:

 

1. Luxury Cars: Cars longer than 4 metres with engines above 1,200cc (petrol) or 1,500cc (diesel), including SUVs and MPVs meeting these specifications.
2. Motorcycles: Two-wheelers with engine capacity greater than 350cc, often classified as premium or super motorcycles.
3. Helicopters: Personal and commercial helicopters fall under the 40% GST rate.
4. Yachts and Pleasure Boats: All yachts and motor pleasure boats are included in the highest tax bracket.
5. Aerated, Carbonated, and Caffeinated Beverages: Soft drinks and energy drinks are taxed at 40% GST now.
6. Luxury Watches: High-end watches have been moved to the 40% slab (implied under luxury goods category).

 

These items are taxed at the 40% slab to discourage excessive consumption of luxury and sin goods while increasing revenue from these categories.

 

 

Here is the list of commodities that come under the new 40% GST slab in GST 2.0, along with their respective GST rates prior to GST 2.0:

 

Commodity	GST Rate Before GST 2.0	GST Rate Under GST 2.0
Luxury cars (length >4m, petrol engine >1200cc, diesel engine >1500cc)	28% + cess	40%
SUVs and MPVs meeting above engine/length criteria	28% + cess	40%
Motorcycles with engine capacity above 350cc	28%	40%
Helicopters	28%	40%
Yachts and motor pleasure boats	28%	40%
Aerated, carbonated, and caffeinated drinks	28%	40%
Lottery, betting, gambling, casinos, horse racing, online gaming	28% + cess (varies)	40%

 

Note: Tobacco products like cigarettes, bidis, gutkha, and pan masala remain at the old 28% GST plus compensation cess rate and are not moved to the 40% slab immediately under GST 2.0.

This classification reflects GST 2.0’s policy to target luxury and sin goods with a higher tax rate while providing relief on everyday items.

 

Future Prospects

 

This overhaul is seen as a precursor to even more ambitious reforms, including a possible single nationwide GST rate in future phases—making India’s tax system even more transparent and competitive. The GST Council, backed by unanimous support from all states, considers GST 2.0 a “citizen-friendly” tax regime, with focused benefits for the common man, MSMEs, and growth sectors like healthcare and agriculture.