GST Overhaul Explained: New 5% and 18% Slabs, 40% Tax on Luxury Goods

by Shan 2025-09-04 11:53:34

India is about to experience the most significant Goods and Services Tax (GST) reform since its inception as a reform in 2017. The GST Council has approved massive changes to the tax regime by reducing the tax burden on essential goods and increasing taxes on luxury and "sin" goods. The new tax burden will become effective September 22, 2025, and it will be transformative to household consumption, units of production, and the whole economy.

This blog will detail what changed, what became cheaper, what became more expensive, and more importantly, why these changes matter to consumers and units of production.

What Changed in GST?

Earlier, India had four major GST slabs: 5%, 12%, 18%, and 28%. That structure has now been reduced to:

5% slab – covering essentials and mass-consumption goods.
18% slab—for most goods and services that were earlier taxed at 12% and 18%.
40% slab—a special rate for luxury goods, carbonated beverages, and gambling services.

This shift is designed to simplify tax compliance, boost consumption, and balance government revenues.

Old Slabs	New Structure	Example Items
5%	5%	Chapati, milk, life insurance
12%	18% / 5%	Shampoo (now 5%), cement (now 18%)
18%	18% / 5%	ACs (now 18%), biscuits (now 5%)
28%	18% / 40%	Cars (18% small cars, 40% big cars), soft drinks (40%)

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What Gets Cheaper Under GST 2.0?

The rate cuts will directly impact household budgets, farmers, small businesses, and healthcare costs.

1. Food & Beverages

Nil GST on chapatis, paranthas, paneer, ultra-high temperature milk, khakra, and pizza bread.
5% GST on butter, ghee, dry fruits, condensed milk, sausages, jam, fruit jellies, packaged drinking water, namkeen, and cereals (down from 18%).
Plant-based milk and soy milk drinks are now taxed at 5% instead of 18%.
Ice cream, biscuits, pastries, and sugar confectionery also shift to 5%.

Takeaway: A middle-class family could save a few hundred rupees each month on groceries and packaged food

2. Household Items
Toothpaste, toothbrushes, shampoo, soap, hair oil, and talcum powder → 5% (down from 18%).

Kitchenware, utensils, feeding bottles, bicycles, bamboo furniture, and umbrellas → 5% (down from 12%).

Example: A family that spends ₹1,500 a month on toiletries will now save around ₹200–250.
3. Consumer Appliances
Air conditioners, dishwashers, and televisions (previously 28%) now fall under 18% GST.

This makes white goods more affordable for middle-income households.

4. Stationery & Education Supplies
Maps, globes, notebooks, crayons, and exercise books → nil GST.

Erasers → nil GST (earlier 5%).

This helps reduce education costs, especially for students in rural and semi-urban India.
5. Healthcare
Life-saving drugs → 5% or nil GST.

Medical-grade oxygen, diagnostic kits, glucometers, and corrective spectacles → 5% (down from 12–18%).

Nil GST on individual life and health insurance policies.

Impact: A ₹20,000 annual health insurance premium will now be free from 18% GST, saving families ₹3,600 a year.
6. Travel & Hospitality
Hotel tariffs up to ₹7,500 → 5% GST.

Economy class flight tickets → 5% GST (earlier 12%).

This gives a boost to the tourism and aviation sectors.
7. Vehicles & Auto Components
Motorcycles up to 350 cc → 18% GST (down from 28%).

Small hybrid cars also get tax relief.

Electric vehicles stay at 5% GST.

Auto components shift from 28% to 18%.

Cement is also down from 28% to 18%.

This is expected to lower the cost of construction and give a push to the real estate sector.
8. Agriculture & Fertilisers
GST on agricultural machinery → 5% (earlier 12%).

Fertilizer inputs like sulfuric acid, nitric acid, and ammonia → 5% (down from 18%).

Neem-based pesticides and micronutrients also cut to 5%.

Farmers stand to benefit the most, reducing costs of cultivation.
9. Wellness & Personal Care Services
Gyms, yoga classes, health clubs, and salons → 5% GST (earlier 18%).

This makes health and wellness more accessible to urban consumers.
What Gets Costlier?
Not everything is cheaper. The government has used the 40% slab to target luxury consumption and harmful products.
1. Aerated & Caffeinated Drinks
Coke, Pepsi, Red Bull, and other carbonated drinks → 40% GST (up from 28%).

All sugar-sweetened beverages → 40% GST.

2. Luxury Vehicles & Yachts
Cars above 1,200 cc and longer than 4,000 mm → 40% GST.

Motorcycles above 350 cc, yachts, and private aircraft are also taxed at 40%.

3. Tobacco & Cigarettes
Still under 28% GST + cess, but expected to move to 40% once cess repayment obligations end.

4. Gambling, Casinos & Online Gaming
Casinos, horse racing, online money gaming, and IPL tickets → 40% GST.

Why These Changes Matter
For Consumers
Relief on essentials → groceries, medicines, insurance.

Savings on education → books and stationery tax-free.

Cheaper vehicles and cement → lower home and transport costs.

For Businesses
FMCG and retail companies expect higher sales volume.

The auto industry gains from lower two-wheeler and small car taxes.

Hospitality and travel sectors benefit from reduced rates.

The beverage, tobacco, luxury car, and gaming industries face higher costs.
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For the Economy
Encourages domestic spending at a time when US tariffs are hurting exports.

Could lead to a short-term dip in GST revenue, but higher consumption may make up for it.

Simplification of slabs (from four to two) improves compliance.

Key Challenges Ahead
Revenue Shortfall for States: Lower rates may shrink GST collections in the near term.

Complexity of 40% Slab: Businesses fear disputes over categorization of products.

Dependence on Sin Taxes: Government continues to rely on tobacco and alcohol for revenue.

The Bigger Picture
The government has packaged this as part of PM Modi’s “Next-Generation GST Reforms,” which is intended to make taxes simpler, consumer-friendly, and focused on growth. As India gears up for elections, relief on essentials will be popular with households, farmers, and small businesses.
In addition, India is also experiencing external shocks from US tariffs on exports, so increasing local demand is critical. A lower GST on daily items could act as that cushion.
Final Takeaways
Clear Winners: Households, farmers, students, small businesses, healthcare, travel, and auto sectors.

Clear Losers: Luxury purchasers, tobacco manufacturers, soft drink producers, and gambling operators.

Future to Watch: Will consumption pick up enough with lower rates to compensate for lost revenues? Will states face funding stress?
This GST overhaul is more than a tax tweak—it’s a change in economic strategy, signalling that India is looking to rely on domestic demand to drive growth.
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