Authors:
Eight years since the introduction of GST, the Government of India has indicated its willingness to script the next chapter in tax reform. While the Prime Minister’s speech on Independence Day praised GST, it also indicated the direction for GST tomorrow: simplification by a drastic cut in the number of rate slabs, rectification of structural aberrations, and use of technology for compliance. Underlying the political spin is a radical policy proposal i.e. merging five tax brackets into only two main slabs of 5% and 18%, with an additional 40% “sin” band for a limited range of luxury and vice products.
This is not merely cosmetic streamlining. It is a serious effort to employ tax policy as a club to encourage household consumption, re-ignite private investment, and minimise compliance drag for firms. For business corporates, the discussion cannot end at “rates falling.” What is important is how that shift reshapes pricing strategies, consumer behaviour, working capital cycles, and competitive dynamics1.
The Finer Print
The press release issued by the Ministry of Finance has laid down the 3 key pillars which would be the focus of these reforms:
Pillar 1: Structural reforms:
- Inverted duty structure correction: The correction of inverted duty structures to align input and output tax rates so that there is a reduction in the accumulation of input tax credit. This would support domestic value addition.
- Resolving classification issues: Resolve classification issues to streamline rate structures, minimise disputes, simplify compliance processes, and ensure greater equity and consistency across sectors.
- Stability and Predictability: Provide long-term clarity on rates and policy direction to build industry confidence and support better business planning.
Pillar 2: Rate Rationalisation:
- Reduction of taxes on common-man items and aspirational goods: This would enhance affordability, boost consumption, and make essential and aspirational goods more accessible to a wider population.
- Reduction of slabs: Essentially move towards a simple tax with 2 slabs – standard and merit. Special rates are available for a select few items. It is reported that the slab rates of 12% and 28% may be eliminated. It may be noted that services are generally covered under the GST rate of 18% and the said rate would be retained for the services sector.
- Compensation Cess: The end of compensation cess has created fiscal space, providing greater flexibility to rationalise and align tax rates within the GST framework for long-term sustainability.
Pillar 3: Ease of Living:
- Registration: seamless, technology-driven, and time-bound, especially for small businesses and startups.
- Return: Implement pre-filled returns, thus reducing manual intervention and eliminating mismatches.
- Refund: faster and automated processing of refunds for exporters and those with an inverted duty structure.
Sectoral Implications of the Changes
1. Automotive (Cars, 2-wheelers, CVs, Tractors)
- Small cars, two-wheelers, and commercial vehicles will see their GST rates reduced from 28% to 18%. OEMs are cited as primary beneficiaries. Tractors may see rates fall from 12% to 5% 2.
- Automotive demand is expected to rise as retail prices likely to fall by 8–10%, benefiting both buyers and manufacturers3.
2. Household Appliances & Electronics
- Air conditioners, refrigerators, televisions, and other large household appliances currently in the 28% slab are expected to move to 18%, making them cheaper and boosting demand 4.
3. Consumer Goods, FMCG, and Processed Foods
- Most goods in the 12% slab, including packaged foods, dairy, and beverages, will move down to 5%, benefiting companies in the food, beverage, and FMCG sectors.
- Personal care items such as hair oil and toothpaste may also see reduced rates.
4. Cement and Construction Materials
- Cement’s GST is likely to drop from 28% to 18%, with a predicted major revenue impact but a positive effect for infrastructure, housing developers, and related firms.
5. Insurance, Financial Services, and Retail Lending
- Reduction in GST rates on insurance premiums (health and general insurance)5 It is expected to improve affordability and potentially expand retail insurance penetration.
6. Apparel, Footwear, and Hotel Accommodation
- Products and services in the 12% slab including apparel, footwear, and hotel rooms are expected to join the 5% category, making them more affordable and benefiting the retail and hospitality industries6.
7. Renewable Energy, Fertilizer, and Agriculture
- GST reforms may benefit renewable energy and fertilizer producers by lowering rates and simplifying compliance7.
- Agriculture-related businesses, especially those dealing in agri-inputs and machinery, are mentioned as likely beneficiaries due to easier compliance and potential rate cuts.
8. MSMEs and Startups
- Pre-filled returns and automated refunds are designed to reduce compliance burdens and enhance ease of doing business for MSMEs and startups.
9. Medical Devices and HealthcareAnticipated GST reductions on medical devices, medicines, and healthcare supplies as part of the essential goods moving to lower tax brackets. Merging the 12% slab with the 5% would cut GST on a host of essential goods, including medicines.
Notably Excluded or Unchanged Sectors:
- Petroleum, real estate, and alcohol remain outside GST and are not affected by these reforms8.
- Diamonds, gemstones, and luxury goods may either retain present rates or move to a special “sin/luxury” tax bracket.
Deeper Impact for Business Leaders & Actionable Steps
Supply Chain and Cost Remodeling
Rationalisation of GST will have echoes in supply chains, forcing companies to redesign cost structures and sourcing approaches. Reduced slabs in cement, appliances, and intermediate products will reduce landed costs, but more significantly, the elimination of inverted duty structures may change the economics of local versus imported sourcing. Boards need to utilise this juncture not just to renegotiate buyer agreements and distribution incentives but also to make supply chain resilience a point of competitive strength.
Working out transitional changes
The unsold inventory as well as raw material/components need to be managed before the effective date of change. Consumers may also delay spends on Automobiles and Consumer Durables till the rate reduction, and it may prompt the management to rework their production plans for both phases i.e. before reduction of rates and after reduction of rates to align with the demand.
Anti-Profiteering Conundrum With reduced GST rates, pricing choices will come under tighter examination. It may be noted that Anti Profiteering mechanism was discontinued under GST9. However, it is likely that it may make a come-back after the rate changes. In case, the provisions are reactivated GST authorities will likely insist on strong economic proof about how tax benefits were passed on to consumers. This entails more than mere price comparisons and necessitates SKU-level documentation, real-time data trails, and board-approved rationales for pricing moves.
Aligning Capex and Investment Strategy
Finally, rationalisation is an investment signal as well as a tax reform. Lower cement, building materials, and appliance prices might rekindle housing and infrastructure demand, spurring downstream opportunities for real estate financing, financial services, and steel.
Proactive Engagement with Policymakers
Finally, leadership must engage early with policymakers and industry bodies. GST Council decisions will be influenced by credible industry feedback. Those companies that approach the policymakers with strong data and sectoral facts will stand a better chance of influencing decisions in their favour.
Rate Change Mechanism & Timelines
The mechanism for GST reduction and revamp in India, as outlined by the Government’s proposal and official releases, involves a multi-step process through formal institutions. The process involves the following steps:
1. Proposal by the Central Government
- The Ministry of Finance has put a proposal before the Group of Minister10 (GoM) on Rate Rationalisation for considering the removal of 12% and 28% GST slab rate.
2. Referral to GST Council’s Group of Ministers (GoM)
- The proposal is sent to the GoM, a subcommittee within the GST Council, for detailed examination. The GoM analyses the impact across sectors, considers state-level concerns, and suggests necessary modifications or consensus on the proposal.
- The GoM has approved11 The proposal to retain 5% and 18% slab rates; in effect, the slab rates 12% and 28% would be removed.
- The GoM has recommended that sin goods (including luxury goods/ cars) to be taxed at 40%. GST Compensation Cess may be discontinued on all goods.
3. Deliberation by the GST Council
- The next GST Council meeting is expected to be held on September 18-19 wherein the GoM would be presenting its final report on rate rationalisation.
4. Implementation by Central and State Governments
- Following the GST Council’s approval, the Central Board of Indirect Taxes and Customs (CBIC) and state GST authorities will issue notifications to formally implement the revised rates.
We expect the changes to be implemented by October 2025.
1 https://www.news18.com/business/economy/centres-gst-rate-rationalisation-plan-sent-to-gom-for-
approval-9518878.html
2 https://economictimes.indiatimes.com/markets/stocks/news/gst-rate-cut-auto-cement-among-other- sectors-likely-to-benefit-post-pms-i-day-announcement/articleshow/123358768.cms
3 https://www.ndtv.com/auto/gst-reforms-2025-what-a-tax-cut-on-vehicles-means-for-indias-auto- industry-9114008
4 https://www.reuters.com/world/india/indias-complex-gst-tax-how-modis-reform-will-make-goods- cheaper-2025-08-19/
5 https://www.indiatoday.in/business/personal-finance/story/gst-on-life-and-health-insurance-may-soon- be-exempt-what-it-means-for-you-2774508-2025-08-21
6 https://sharpely.in/blog/gst-reforms-2025:-india%E2%80%99s-path-to-affordable-living-and- economic-growth
7 https://www.youtube.com/watch?v=_yskCiqdd_Y&t=7s (1:30)
8 https://forumias.com/blog/gst-reforms-need-challenges-explained-pointwise/
9 A sunset clause was set for April 1, 2025, as the deadline for filing fresh profiteering complaints, though ongoing Anti Profiteering cases are mandated to continue.
10 Constituted vide decision of the GST Council in 45 th Meeting held on 17.09.2021.
11 https://economictimes.indiatimes.com/news/economy/policy/gom-accepts-centres-gst-proposal-to- recommend-scrapping-of-12-28-slabs/articleshow/123428196.cms?from=mdr
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