04.09.2025

GST Reforms 2025

Context

India introduced GST in 2017 to unify multiple indirect taxes under “One Nation, One Tax.” New reforms from September 2025 further streamline GST, enhancing simplicity, efficiency, and fairness in the tax system.

GST Evolution and Structure

• Pre-GST Scenario:
  • India’s tax regime was fragmented, with various indirect taxes complicating compliance for businesses and customers.
• Launch of GST (2017):
  • GST unified taxes nationally, initially using five major slabs: 0%, 5%, 12%, 18%, and 28%.
  • Necessities (e.g., milk, salt) fell in the 0% category; luxury products (cars, air conditioners) attracted the highest rate (28%).
• New Rates (from September 2025):
  • Approved in the 56th GST Council meeting.
  • The revised GST structure centers on two key rates—5% and 18%.
  • The 12% and 28% slabs are discontinued.
  • 0% is retained for tax-exempt items.
  • A new 40% rate is introduced for top-end luxury products (like elite vehicles, helicopters); inclusion of tobacco and pan masala is under review.

Highlights of Rate Adjustments

• Essentials:
  • Personal care products (hair oil, toothpaste, shampoo, etc.) are now taxed at 5%, down from 18%.
  • Dairy items such as butter, cheese, and ghee moved from 12% to 5%.
• Agriculture:
  • Inputs and parts for tractors, as well as irrigation equipment, now taxed at 5%.
• Healthcare:
  • Health insurance, study materials (books, maps, pencils, etc.) are now tax-free (0%).
  • Thermometers and medical oxygen dropped to 5%.
• Vehicles & Appliances:
  • Hybrid and petrol/diesel vehicles move to 18% (from 28%).
  • Electric vehicles stay at 5%.
  • Cement, TVs, ACs, and LCD/LED screens now at 18%.
• Infrastructure:
  • Cement’s GST reduced from 28% to 18%.

Revenue Implications

• The government projects a reduction in tax collections by ₹48,000 crore due to lowered rates.
• Increased consumer spending, stemming from lower prices (Buoyancy Effect), may compensate for potential revenue gaps.

Drivers of Reform

• Simplification: Fewer slabs make GST easier to administer and understand.
• Ease for Consumers: Commodities and necessities become more affordable or fully tax-exempt.
• Sectoral Growth: Sectors such as agriculture, infrastructure, and consumer goods may see increased activity due to lower input costs.
• Luxury Taxation: The new 40% slab targets high-end goods for additional revenue.

Potential Issues

• Fiscal Strain: Lower GST collections may pressure the fiscal deficit.
• State Revenues: Phasing out the compensation cess could pinch state budgets.
• Business Adaptation: Enterprises require time to update systems and adapt to new rates.
• Zero-Rating Concerns: Extensive zero-rating (taxing many items at 0%) could further challenge revenue collection.
• Risk of Illicit Trade: High rates on select luxury goods may incentivize black market activity.
• Administration: Defining and regulating the 40% premium slab could be complicated.

Conclusion

The 2025 GST reforms aim to simplify taxation, support consumers, and boost industries, but careful management is crucial to address revenue challenges and ensure smooth implementation across all sectors for balanced growth.