Only Two-slab system in GST

Big GST cheer for common man! Two-slab tax structure to replace 5-28% rates; Finance ministry shares important details.

Centre Proposes Reducing GST Slabs From 4 To 2, May Retain 5%, 18%: Sources

EXISTING GST STRUCTURE (as of 2024)

Slab                                                    Examples of Goods/Services  

0%                                                             Unbranded food grains, fresh fruits, vegetables

5%                                                             Essentials like edible oils, footwear under ₹1,000

12%                                                           Processed foods, mobile phones, fruit juices

18%                                                           Soaps, toothpaste, ACs, restaurants

28%                                                           Luxury goods, cars, tobacco

+ Cess                                                       Applied to sin goods like pan masala, coal, aerated drinks

Note : There are also special rates like 0.25% for precious stones and 3% for gold.

What's being proposed

• Fewer GST slabs : The Centre has sent a plan to the GST Council's Group of Ministers (GoM) to shrink today's 4 main slabs (5%, 12%, 18%, 28% + cess on some items) into two core slabs-5% and 18%-plus a special high rate for a short list of luxury & "sin" goods. The change was flagged by the PM in his Independence Day (15 Aug 2025) address, with an implementation target around Diwali (Oct 2025).
• Big relief at the low end : The intent is to move "common man" items into the 5% slab. Media briefings say ~99% of goods currently at 12% would drop to 5%, cutting prices for many day-to-day products.
• Standardizing the middle : A large share of items presently taxed at 28% would shift down to 18%, making 18% the default "standard" rate for most goods & services.
• Special high rate for demerit items : A ~40% GST is envisaged for a very small list (about 7-8 items) of luxury/sin goods (tobacco products are named explicitly; the rest are yet to be finalized). This looks designed to replace today's 28%+compensation-cess structure for those few categories. (The cess regime is anyway slated to end on March 31, 2026, so a replacement was due.)
• Outside GST stays outside : Petroleum products (like petrol/diesel) will remain outside the GST net under this revamp. Alcohol for human consumption already sits outside GST and is unaffected.

How the slabs would look (at a glance)

Today                                                                                                  Proposed

0%/Exempt (limited list)                                                               0%/Exempt (no change announced)

5%                                                                                                     5% ("merit"/common-use items; many from today's 12%)

12%                                                                                                      - (folded into 5% or 18%)

18%                                                                                                    18% (standard rate)

28% + Compensation Cess on select goods               Most of today's 28% to 18%; a special ~40% for a tiny set of luxury/sin goods to replace the cess on those.

Petroleum & alcohol                                                                       Still outside GST

What could get cheaper or stay dear

• Likely cheaper (if moved down) : segments flagged in briefings include agriculture, textiles, fertilizers, auto parts, handicrafts, medical devices, and insurance (areas with many items at 12% now). Reality will depend on the final item-wise list approved by the Council.
• Still taxed heavily : A very small basket of luxury/sin goods (e.g., tobacco products) could sit at ~40%. The government has also indicated it wants to keep the overall tax incidence on demerit goods broadly unchanged even as the cess framework winds down, hence the special rate. Details per item are pending.

Why the government is doing this

1. Simplicity for consumers & businesses : Fewer slabs = easier classification, billing, and compliance; fewer disputes and "rate-fit" tussles.
2. Fixing "inverted duty structures" : In many chains inputs are taxed higher than outputs (or vice-versa), creating working-capital lockups and refunds. Rationalisation aims to reduce these distortions.
3.  Support consumption : Analysts estimate the plan could boost household purchasing power; Citi pegs a potential 50,000 crore (~0.15% of GDP) annual revenue hit from rate cuts but expects a consumption lift to partly offset it.
4. Replace the expiring cess : With the compensation cess ending March 31, 2026, a stable long-term structure (including a clear treatment of demerit goods) is needed.

What's the timeline & process?

• August 15, 2025 : PM announced the reform push and a Diwali 2025 rollout aim (Diwali falls in late October 2025).
• September 2025 (expected) : GST Council (chaired by the Union Finance Minister; includes all State FMs) is likely to meet to consider the GoM's proposal. If approved, the Centre and states will issue rate-change notifications.

Who is shaping the details?

• A GOM on Rate Rationalisation, convened by Bihar Deputy CM Samrat Chaudhary, is working on the item-wise blueprint and slab merges. The panel has met multiple times since 2024 and will feed its recommendations to the Council.

What's still unknown (and worth watching)

• Exact item lists : Which 12% items move to 5%, and which 28% items fall to 18%. Early signals cover sectors, not definitive product lists.
• The "~40%" basket : Apart from tobacco, which other goods (if any) make this tiny list; and whether the rate fully replaces today's cess incidence for each.
• State consensus : Past GoM meetings show states differ on how fast and how far to cut/merge slabs; watch the September Council meet for final bargains.