Two-Rate GST System to Roll Out on September 22

Why in the News?

• The GST Council, in its 56th meeting, approved a two-rate GST structure (5% and 18%) with effect from September 22, 2025.
• A special 40% slab was introduced for sin goods (tobacco, gutka, luxury cars, yachts, helicopters).
• Several essential and common-use items, along with life-saving medicines and insurance policies, saw steep rate reductions.

Background

• GST was introduced in 2017 as a multi-rate structure with 5%, 12%, 18%, and 28% slabs, plus cess.
• Over time, criticism arose regarding complexity, inverted duty structures, and high rates on essentials.
• The GST Council has periodically rationalised rates, but this is the most comprehensive shift towards rate simplification.
• The government estimates a revenue implication of ₹48,000 crore, but expects buoyancy and better compliance to offset losses.

Features of the Two-Rate GST

New Rate Structure

• 5% slab: Common-use goods (soaps, shampoos, toothpaste, bicycles, 
• kitchenware, bio-pesticides, handicrafts, leather goods, cement).
• 18% slab: Most other goods and services.
• 40% special slab: Sin and super-luxury goods (tobacco, pan masala, aerated drinks, high-end cars, yachts, helicopters, private planes).

Zero-Rated Items

• Life-saving medicines (33 drugs).
• Individual health and life insurance policies.
• Basic foods: Indian breads (rotis, chapatis, parathas), paneer, UHT milk.
• Spectacles for vision correction.

Inverted Duty Rectification

• Textiles: Manmade fibre (18% – 5%), yarn (12% – 5%).
• Fertilisers: Sulphuric acid, nitric acid, ammonia (18% – 5%).

Challenges

• Revenue impact: Short-term revenue loss of ₹48,000 crore could strain the fiscal position.
• State compensation issue: Transitioning tobacco to 40% only after central loans to States are cleared may create friction.
• Risk of inflation pass-through: Although aimed at reducing prices, businesses may not fully pass benefits to consumers.
• Luxury/sin goods classification disputes: Possible litigation around what qualifies as “luxury.”
• Compliance costs: Businesses will still deal with exemptions, zero-rating, and special categories, preventing true single-rate simplicity.

Way Forward

• Gradual move towards a uniform rate: Eventually, merge slabs into a simpler structure for transparency and compliance ease.
• Strengthen compliance systems: Use AI-enabled GSTN monitoring to prevent evasion, especially in sin goods.
• Compensate States fairly: Ensure smooth revenue-sharing to avoid federal tensions.
• Consumer monitoring: Enforce mechanisms so that tax cuts reflect in reduced retail prices.
• Sector-specific reviews: Keep updating rates to address distortions (e.g., MSMEs, textiles, agriculture).

Conclusion

The two-rate GST reform is a significant step toward simplification, equity, and consumer relief. While it reduces the burden on the common man and rectifies long-pending anomalies, challenges remain in fiscal balance, state compensation, and compliance. If managed well, this reform can strengthen India’s indirect tax system and enhance both ease of doing business and taxpayer trust.