India’s GST Overhaul: What Goods Become Cheaper and What Gets Costlier

September 4, 2025 Posted by India Briefing Written by Archana Rao Reading Time: 8 minutes

India’s GST reform 2025 simplifies the tax structure to three slabs – 5 percent, 18 percent, and a new 40 percent de-merit rate – making essentials, healthcare, agriculture inputs, and consumer goods cheaper while luxury and sin goods face higher taxes. The overhaul aims to boost consumption, reduce compliance complexity, and create a more transparent business environment.

India’s Goods and Services Tax (GST) Council has approved a radical new reform of India’s indirect tax system. This is the first major update introduced since the launch of GST in 2017. The changes rationalize tax slabs, cut duties on essentials, and restructure rates across multiple sectors to boost consumption and ease the burden on households.

At the same time, certain luxury items and sin goods will face higher taxation.

New GST structure

A major highlight of the GST reforms is the rationalization of the existing tax structure. The existing GST framework operates on a four-tier rate system with slabs of 5 percent, 12 percent, 18 percent, and 28 percent.

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Under the revised framework, a merit rate of 5 percent will apply to essential goods and services and a standard rate of 18 percent will be applied to most goods and services.

In addition, India has introduced a special “de-merit rate” of 40 percent. This higher rate is specifically reserved for luxury goods and socially harmful products, including high-end automobiles, aerated beverages, tobacco, and gambling services.

Streamlining the GST Slabs: Merit, Standard, and De-merit Rates
Aspect	Previous GST structure	Revised GST structure
Rate slabs	Four GST slabs: 5 percent 12 percent 18 percent 28 percent	5 percent (merit rate) 18 percent (standard rate) New special rate of 40 percent for luxury and harmful products (for example, luxury cars, tobacco, aerated drinks, gambling services)*
Merit rate (5 percent)	Applied to limited essentials, such as life-saving drugs, insulin, footwear priced below INR 500, textiles such as fabrics, etc.	Expanded coverage for essential goods and services used in daily life
Standard rate (18 percent)	Existing 18 percent slab but with overlap with 12 percent items	Becomes the uniform rate for majority of goods and services

Note: *De-merit Rate (40 percent) introduced by the recommendations of the 56^th GST Council Meeting. Previously, the highest slab was 28 percent + cess on specific items.

By moving from a complex four-tier system to a simpler structure with clear categories, the reforms aim to reduce disputes, improve transparency, and make GST administration more efficient for both businesses and tax authorities.

GST slab revision in India: What gets cheaper

The new GST structure eases the burden on consumers while also lowering input costs for businesses across key sectors. Industries such as healthcare, agriculture, travel, and wellness gain cost advantages that could strengthen competitiveness and stimulate growth.

Nil GST

Several essentials have been exempted from tax, directly lowering household expenses and operational costs for businesses. Food staples like chapatis, parathas, paneer, UHT milk, khakra, and pizza bread are now tax-free, benefiting both consumers and food processors. The education sector gains relief as stationery items – pencils, notebooks, globes, erasers, and maps – carry no tax, making learning materials more accessible. A major boost comes to the insurance industry, as life and health insurance policies are fully exempt.

5 percent GST

A wide range of everyday essentials and business inputs now fall under the concessional 5 percent rate. In food and beverages, items like butter, ghee, dry fruits, biscuits, juices, cheese, and dairy fats have become cheaper, reducing costs for households and input expenses for the hospitality sector. Personal care products, including soaps, shampoos, toothpaste, talcum powder, and hair oils, earlier taxed at 18 percent, are now taxed at 5 percent, encouraging stronger consumer demand.

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Healthcare affordability has improved, with lifesaving drugs, diagnostic kits, thermometers, corrective spectacles, and medical oxygen now taxed at 5 percent or nil. Hospitals, pharmacies, and medical suppliers benefit from lower input costs, enabling more competitive pricing. Travel and hospitality also see gains – hotel rooms under INR 7,500 per night and economy-class air tickets remain at 5 percent, supporting domestic tourism. The continuation of 5 percent GST on electric vehicles sustains incentives for the clean mobility sector.

For agriculture and small-scale industries, tractors, pumps, irrigation equipment, fertilizer inputs, and sewing machines are all down to 5 percent. This reduction eases capital investment in farming and rural industries. Wellness services, such as salons, gyms, and yoga centers, also shift to 5 percent, making them more affordable for consumers while widening service uptake, though input tax credit remains unavailable.

18 percent GST

The broader application of the standard 18 percent slab reduces complexity and lowers costs on previously high-taxed goods. Consumer appliances like air-conditioners, dishwashers, and televisions up to 32 inches, which were earlier taxed at 28 percent will now attract 18 percent, boosting sales for retailers and manufacturers. In automobiles, motorcycles up to 350 cc, small cars, and auto parts also move to 18 percent, making personal and commercial transport more affordable while benefiting manufacturers through higher volumes.

Construction materials, notably cement, have shifted to 18 percent from 28 percent, which could ease housing and infrastructure costs for developers and contractors. By aligning more goods under a predictable 18 percent slab, businesses gain pricing clarity, reduce disputes, and achieve smoother compliance.

Reduced GST rates

GST Rate on Daily Essentials
Commodities	Previous GST rate	Revised GST rate
Hail oil, shampoo, toothpaste, toilet soap bar, toothbrushes, shaving cream	18%	5%
Butter, ghee, cheese and dairy spread	12%	5%
Prepacked snacks like mixtures and bhujiya	12%	5%
Utensils	12%	5%
Feeding bottle, napkins for babies and clinical diapers	12%	5%
Sewing machines and parts	12%	5%

GST Rate on Healthcare Sector
Commodities	Previous GST rate	Revised GST rate
Individual health and life insurance	18%	Nil
Thermometer	18%	5%
Medical grade oxygen	12%	5%
All diagnostic kits and regents	12%	5%
Glucometer and test stripes	12%	5%
Corrective spectacles	12%	5%

GST Rate on Education
Commodities	Previous GST rate	Revised GST rate
Maps, charts and globe	12%	Nil
Pencil sharpener, crayons and pastels	12%	Nil
Exercise notebooks and books	12%	Nil
Eraser	5%	Nil

GST Rate on Farming and Agriculture
Commodities	Previous GST rate	Revised GST rate
Tractor tires and parts	18%	5%
Tractors	12%	5%
Specified bio-pesticides, micro nutrients	12%	5%
Drip irrigation systems and sprinklers	12%	5%
Agricultural, horticultural, forestry machines for soil preparations, cultivations, harvesting and threshing	12%	5%

GST Rate on Automobiles
Commodities	Previous GST rate	Revised GST rate
Petrol and petrol hybrid, LPG, CNG cars (not exceeding- 1200 cc and 4000 mm)	28%	18%
Diesel and diesel hybrid cards (not exceeding- 1500 cc and 4000 mm)	28%	18%
3-wheeled vehicles	28%	18%
Motorcycles (350 cc and below)	28%	18%
Motor vehicle for transport of goods	28%	18%

GST Rate on Electronic Items
Commodities	Previous GST rate	Revised GST rate
Air conditioners	28%	18%
Television (above 32 inches) (including LED and LCD TVs)	28%	18%
Monitor and projectors	28%	18%
Dishwashing machine	28%	18%

What becomes costlier?

While essentials become cheaper, the new GST framework imposes significantly higher taxes on luxury and “sin” goods, shifting the burden toward discretionary spending.

GST Rate on Transport and Automobiles
Commodities	Previous GST rate	Revised GST rate
Motor cars and other motor vehicles principally designed for the transport of persons (other than those of heading 8702), including station wagons and racing cars	28%	40%
Motor vehicles with both spark-ignition internal combustion reciprocating piston engine and electric motor as motors for propulsion, of engine capacity exceeding 1200cc or of length exceeding 4000 mm	28%	40%
Motor cycles of engine capacity exceeding 350 cc	28%	40%
Yacht and other vessels for pleasure or sports	28%	40%

GST Rate on Textile and Clothing
Commodities	Previous GST rate	Revised GST rate
Articles of apparel and clothing accessories, knitted or crocheted, of sale value exceeding INR 2500 per piece	12%	18%
Articles of apparel and clothing accessories, not knitted or crocheted, of sale value exceeding INR 2500 per piece	12%	18%
Cotton quilts of sale value exceeding INR 2500 per piece	12%	18%
Products wholly made of quilted textile material exceeding INR 2500 per piece	12%	18%

GST Rate on Sin Goods
Commodities	Previous GST rate	Revised GST rate
Unmanufactured tobacco; tobacco refuse [other than tobacco leaves]	28%	40%
Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes	28%	40%
Other manufactured tobacco and manufactured tobacco substitutes; “homogenised” or “reconstituted” tobacco; tobacco extracts and essences	28%	40%
Products containing tobacco or nicotine substitutes and intended for inhalation without combustion	28%	40%

GST Rate on Food Items
Commodities	Previous GST rate	Revised GST rate
Other non-alcoholic beverages	18%	40%
Pan masala	28%	40%
All goods [including aerated waters], containing added sugar or other sweetening matter or flavored	28%	40%
Caffeinated Beverages	28%	40%
Carbonated Beverages of Fruit Drink or Carbonated Beverages with Fruit Juice	28%	40%

GST rate changes in 2025: Implementation timeline

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The 56^th Meeting of the GST Council has recommended that the revised tax rates for goods and services be introduced starting September 22, 2025. However, considering the financial obligations under the compensation cess framework, the rollout will follow a phased approach:

Services: All changes to GST rates on services will take effect from September 22, 2025.
Goods: New rates for goods, with the exception of tobacco-related products, will also be applicable from September 22, 2025.
Refund mechanism: Pending necessary amendments to the CGST Act, 2017, the Central Board of Indirect Taxes and Customs (CBIC) will begin administrative implementation of the revised refund system. This will allow 90 percent provisional refunds arising from inverted duty structures, based on system-driven data analysis and risk evaluation, similar to the process already followed for zero-rated supplies.

GST rate changes – FAQs

1. When will the new GST rates apply?

The revised GST rates will come into effect from September 22, 2025, for services and most goods. However, products like cigarettes, chewing tobacco (zarda), unmanufactured tobacco, and bidis will continue with the current GST rates and compensation cess. The new rates for these products will only apply once all loan and interest obligations under the compensation cess are cleared.

2. Has the registration threshold under GST changed?

No. The threshold for registration of goods under the CGST Act, 2017 remains unchanged.

3. Where will the official notification be available?

The revised rates will be notified through a rate notification, which will be published on the CBIC website.

4. What happens if I supplied goods/services before the rate change but issued the invoice afterward?

According to Section 14 of the CGST Act, 2017:

If payment is received after the rate change, the tax liability will be based on the invoice date or payment date, whichever is earlier.
If payment is received before the rate change, the tax liability will be based on the date of payment.

5. How will GST apply on advances received before the rate change?

The applicable GST will be determined by the time of supply provisions under Section 14 of the CGST Act, 2017.

6. Can I claim ITC on purchases made before the rate change?

Yes. If tax has been correctly charged on your inward supply at the prevailing rate at that time, you can claim input tax credit (ITC). This ITC will be credited to your electronic credit ledger, subject to the conditions of Section 49 of the CGST Act, 2017.

7. What about IGST on imports?

IGST on imported goods will follow the revised GST rates in the notification, unless an exemption is specifically provided.

8. If GST on my outward supplies is reduced, what happens to ITC already available at the higher rate?

You can continue to use the ITC already credited in your electronic credit ledger – even if the outward supply is now taxed at a lower rate. ITC remains valid and can be used to pay future tax liabilities as per Section 49(4) of the CGST Act.

Trade facilitation to improve ease of doing business

On September 3, 2025, India also approved several process reforms aimed at simplifying compliance and making trade operations smoother. A key step in this direction is the operationalization of the Goods and Services Tax Appellate Tribunal (GSTAT). Businesses will be able to file appeals with the tribunal by the end of September 2025, and hearings are scheduled to begin in December 2025. To address pending matters, the Council has set June 30, 2026 as the deadline for filing all backlog appeals.

In addition, the Principal Bench of the GSTAT will also serve as the National Appellate Authority for Advance Ruling, ensuring greater consistency in tax rulings across the country.

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India’s GST Overhaul: What Goods Become Cheaper and What Gets Costlier

New GST structure