By Mukesh Butani, Managing partner, BMR Legal Advocates
The much-anticipated goods and services tax (GST) 2.0 reforms have been formally announced by the GST Council. The 12% and 28% GST slabs were eliminated following its decision. The Council, in continued bipartisanship, decided to effect rate rationalisation, providing a fillip to most sectors and drivers of our economy. Since its inception, the GST rate framework has remained a subject of debate, discussions, and deliberations on the fine print and resultant controversies. Coming close on the heels of the tariff announcement by the Trump administration—which impacts nearly $60 billion worth of exports from India to the US—the GST 2.0 reforms are a bold policy attempt by the government to propel the animal spirits of our economy.
The 56th GST Council meeting, held on Wednesday, heralded a spirit of change, traversing the discourse around long-awaited reforms to the existing framework. Among the most notable developments is the much-anticipated reduction in GST rates, which come into effect from September 22, along with the correction of inverted rate structure and trade facilitation measures for micro, small, and medium enterprises (MSMEs) and small taxpayers. Key commodities which would see a reduction in GST rate are air conditioners, small cars, buses, motorcycles, staples, lifesaving drugs, medical devices, renewable energy devices, etc. A noteworthy point is the GST reduction on handicrafts, marble, granites, and leather goods, which are areas impacted by the US tariffs, thus giving a fillip to these labour-intensive industries by creating domestic demand.
GST on individual life and health insurance policies has been exempted with the objective of making insurance more affordable and to add an element of fecundity to insurance for the common man. This measure is further aided by widened access to financial security, thereby encouraging greater participation in insurance schemes and ultimately increasing insurance coverage across the country. Notably, the Council continues to retain a higher GST rate of 40% on “sin goods” such as carbonated drinks, larger vehicles, pan masala, and certain services such as admission to casinos and Indian Premier League events.
The rationalisation of GST rates by subsuming five different slabs into two categories of 5% and 18% headlines the announcements. This much-vaunted simplification not only edifies the tax framework but also makes compliance easier for businesses, especially small and medium enterprises. The move casts a positive light on the previous measures taken by the government to benefit MSMEs.
The reduction in tax rates shall enhance affordability for consumers en masse. By ensuring essential goods remain under the lower 5% bracket and aspirational or value-added tax products are taxed at 18%, the government has struck a balance between revenue generation and consumer welfare. This structural shift is expected to augment consumption, encourage formalisation of the economy, and solidify the foundation for a transparent and predictable tax environment.
A detailed reading of the announcements posit that the GST Council is focused on resolving keys disputes which industry has been facing. This includes removal of the intermediary-related provision, which has been one of the most litigious areas under the GST law. This announcement not only provides relief to service exporters on this contentious issue, but coupled with expedited refund it gives a certainty to exporters as well. The finance minister also announced that automotive spare parts would now come under a single GST rate of 18%, thereby closing a major classification dispute being faced by the automobile sector. The GST Council had not only addressed a long-pending demand but also taken a decisive step toward stimulating economic growth and boosting domestic consumption. These reforms signal the government’s focus on weeding out frivolous disputes and comes against the backdrop of the GST Amnesty Scheme introduced last year, which sought to resolve issues arising from implementation.
The GST Council has also addressed the long pending issue of operationalisation of the Goods and Services Tax Appellate Tribunal (GSTAT). It has been recommended that the tribunal should be made functional in a time-bound manner, with arrangements in place to accept appeals before the month-end and to commence hearing before the end of December. This long-awaited step is accepted to provide a dedicated forum for effective dispute resolution under the GST regime, reduce the burden on high courts, and bring greater certainty and consistency in the interpretation of GST law, thereby strengthening the overall tax law framework.
The larger impact of GST 2.0 reforms is on the economy, as a big lift is expected in consumption. As goods and services are slated to get cheaper, it would induce a spurt in domestic demand. This move aligns with the increasing of income tax slabs in Budget 2025. By exempting income up to `12 lakh and rationalising higher slabs, the government has left Indian households with more disposable income—reduction in GST rate induces them to spend more. This may lead companies to invest more in manufacturing and supply chain-related activities, which creates avenues for further investment by companies. This move augurs well for the Reserve Bank of India as it announced rate cuts in June, allowing cheaper borrowing for industry. These measures create multiplier effects in the economy by directly increasing purchasing power, stimulate consumption, and reflect a coordinated strategy to simplify taxation and sustain economic momentum.
Over the years, GST collection has shown consistent growth, successfully meeting and even surpassing revenue expectations. This steady increase in revenue demonstrates the effectiveness of GST as a unified taxation system designed to benefit the economy. While the expected GST revenue shortfall is pegged at `48,000 crore, the buoyancy in collection is expected to narrow it down. By rationalising tax rates, the GST Council not only aims to maintain affordability for essential goods but also support the growth of the corporate sector and manufacturing base. The overarching objective is to achieve balanced economic development, which encourages industrial expansion, investment, and innovation. Ultimately, these reforms are intended to strengthen the domestic market, enhance competitiveness, and contribute to all-inclusive growth, as India charts its ascent towards Vishwaguru (world leader) status. The government’s recommendations headline a forward-looking approach towards creating a more business-friendly GST regime.