Prime Minister Narendra Modi has given the first major signal of upcoming Goods and Services Tax (GST) reforms, describing them as a “Diwali Bonanza” during his Independence Day address from the Red Fort. The government is preparing a comprehensive revamp of the GST structure that could make a wide range of essential and consumer goods cheaper. According to officials, the Finance Ministry has been working on this reform plan for over six months, and if the proposals are approved by the GST Council, the revised rates may be rolled out around September or October, just ahead of Diwali, which is typically India’s busiest shopping season. Government sources revealed that work on rationalising GST began as early as February 1, 2025, the very day the Union Budget was presented.
Under the draft plan, several commonly used items are expected to become more affordable. Essential products such as ghee, butter, packaged foods, fruit juices, and packaged coconut water, which currently fall under the 12% tax slab, could be moved to the lower 5% GST category. Similarly, footwear and apparel priced below Rs 1,000 are also likely to shift to the 5% slab, offering households noticeable relief in daily expenses. The government is also considering reducing GST on small cars and two-wheelers under 250cc from 28% to 18%, a move that could stimulate demand in these segments, which have been witnessing sluggish growth. Other goods, including air conditioners, dishwashers, televisions up to 32 inches, and cement, are also on the list for potential rate cuts. Cement, in particular, could see its rate reduced from 28% to 18%, which would directly lower construction and housing costs. Health and life insurance premiums may also be moved to a lower slab of 5%, or possibly even exempted from GST entirely, down from the existing 18%.
A key aspect of the proposed reform is the simplification of the GST structure itself. At present, GST falls into five main slabs — 0%, 5%, 12%, 18%, and 28%, with an additional compensation cess levied on certain goods. The proposal aims to reduce this to just two primary slabs: 5% and 18%. The compensation cess, which has long been a complex element of the GST framework, is expected to be phased out and replaced with a flat 40% levy on a smaller set of “sin goods” such as tobacco and pan masala. According to officials, almost all items currently taxed at 12% — close to 99% of them — could be shifted down to 5%, while nearly 90% of goods in the 28% slab could move to 18%. This would not only simplify the tax system but also make goods more affordable for the average consumer.
Economists point out that these reforms could lead to a short-term reduction in government revenues, estimated at around 0.2% to 0.4% of GDP annually. However, they also highlight that this loss is likely to be offset by a significant boost in household consumption. With goods and services becoming more affordable, spending is expected to rise, thereby stimulating overall economic activity. The proposals put forward by the Fitment Committee will first be reviewed by the Group of Ministers (GoM) on rate rationalisation, headed by Bihar Deputy Chief Minister Samrat Choudhary, in meetings scheduled for August 20 and 21. Once a consensus is reached, the recommendations will be sent to the GST Council, which is expected to convene in mid-September for a final decision.
If implemented, GST 2.0 would represent one of the most significant overhauls of India’s indirect tax system since its introduction in 2017. By simplifying the structure and making essential goods cheaper, the reforms are expected to benefit millions of households, spur demand across key sectors, and provide a much-needed boost to the economy. With the festive season around the corner, consumers could experience lower prices as early as Diwali, making the reform both economically impactful and politically timely.
