The government is preparing to push through one of the most significant overhauls of India’s Goods and Services Tax since the system was rolled out in 2017, with a bold proposal to simplify the rate structure and deliver what Prime Minister Narendra Modi has described as a “Diwali gift” to the nation. Under the plan, GST would be reduced to just two primary slabs — 5% and 18% — while so-called sin goods, including tobacco and pan masala, would face a sharply higher rate of 40%. The proposal, drawn up after months of consultations with states and policy experts, has been sent to the GST Council, which is set to deliberate on it in a two-day meeting scheduled for September.
The reform’s central aim is to cut taxes on essential goods and services that directly impact household budgets. According to government sources, the categories expected to benefit from the lower 5% slab include farm products, a wide range of health-related items, traditional handicrafts, and key financial services such as health and life insurance. Officials believe that making these essentials more affordable will stimulate consumer demand, particularly in rural and lower-income urban households, while also reducing the cost of doing business for small and medium enterprises.
Currently, India’s GST system operates with five main slabs — 0%, 5%, 12%, 18%, and 28% — in addition to separate cess rates on luxury and sin goods. The 12% and 18% brackets cover a significant proportion of goods and services, creating complexity for businesses and compliance officers alike. The proposed changes would completely eliminate the 12% slab, redistributing its items into either the 5% or the 18% category. This rationalisation, according to the Finance Ministry, is expected to make the system easier to understand and administer while reducing disputes over classification.
Prime Minister Modi used his Independence Day address from the Red Fort to set the stage for the announcement, framing it as part of his administration’s commitment to continual economic reform. “Over the past eight years, we implemented a major GST reform and simplified taxes. Now, the time has come for a review. We have conducted it, consulted with states, and are set to introduce a ‘next-generation GST reform’,” he declared, promising that the changes would be ready before Diwali.
The government is aware that cutting GST rates, particularly on widely used goods and services, will carry a short-term revenue cost. However, officials argue that the longer-term effects — higher consumption, improved compliance, and increased business activity — will more than offset any initial losses. Past experience, they note, shows that lower rates combined with simplified structures can reduce tax evasion and bring more traders into the formal economy.
The September GST Council meeting will be decisive. If approved, the new structure could be rolled out within weeks, making it one of the fastest turnarounds for a major fiscal reform in recent years. For households, it could mean cheaper essentials and lower insurance premiums before the festive season shopping rush. For the industry, it could signal a shift toward a more predictable and growth-friendly tax regime. For the government, it would be a chance to showcase a reform that is at once politically popular and economically ambitious — a balancing act that has often proved elusive in India’s tax history.
