India GST Reform: A Major Overhaul of Indirect Taxes
India’s tax landscape is being revolutionised through major reforms to GST rates, aimed at creating a simpler and more efficient system of indirect taxation. The Ecovis Experts examine the scope and impact of these reforms.
India is ready to move towards India’s Vision 2047 with initiatives such as Swadeshi Pitch, the Goods and Services Tax (GST) and a task force for next generation reforms and defence. As part of the process of achieving this objective, the GST Council announced a dual tax structure of 5% and 18%, removing the earlier 12 % and 28% slabs. This is often referred to as ‘GST 2.0’ for simplicity.
The government advised: “These reforms are not just about rate revisions but structural reforms. The intention is to promote a better quality of life. There should be just two tax slabs. These reforms have been designed with the average person in mind.”
The previous multi-slab structure often led to classification disputes, compliance complexities, and inefficiencies in the input tax credit (ITC) chain. These changes are important and beneficial for most industries and consumers, since uniform rates and faster refunds improve businesses’ cash flow, encouraging investment and exports. Overall, these reforms are projected to enhance the role of GST as a growth engine, with the potential for a unified system by 2027.
The new slabs are expected to be implemented from 22 September 2025.
Who Benefits the Most?
The primary beneficiaries are the average person, farmers, small traders and labour-intensive industries. Households benefit from cheaper essentials such as food, personal care products and healthcare, potentially increasing their disposable income.
Farmers benefit from reduced costs of machinery and inputs, thereby improving productivity. Small businesses and artisans in sectors such as handicrafts and textiles experience reduced tax burdens, aiding their competitiveness. Large industries, particularly in the automobile and construction sectors, also benefit from uniform rates, however the focus remains on inclusive growth for the masses.
Sector-Wise Details: Which Sectors Benefit More?
The reforms are designed to provide targeted relief, with varying degrees of impact across different sectors. Here’s a breakdown:
| Sector | Key Changes | Benefits |
| Fast Moving Consumer Goods (FMCG) and Daily Essentials | Rates reduced to 5% on items such as hair oil, shampoos, toothbrushes, toothpaste, kitchenware, packaged namkeens, pasta, noodles, chocolates, jams, cornflakes, butter, ghee, and cheese. Nil rate on UHT milk and pre-packaged paneer. | High benefits for consumers and manufacturers; stimulates demand and reduces prices for mass-market products. Most advantageous for low-income households and small-scale producers. |
| Agriculture | Rates cut to 5% on tractors, soil preparation machinery, harvesting equipment, composting machines, drip irrigation systems, and fertiliser inputs (e.g., sulphuric acid). | Significant relief for farmers, lowering input costs and boosting mechanization. This sector will benefit rural economies the most, enhancing food security and exports. |
| Healthcare | Nil tax rate on all individual life and health insurance policies (including ULIPs, endowments, family floaters, senior citizens), reinsurance, and 36 lifesaving drugs/medicines for cancer, rare diseases, etc. Other medicines and devices (e.g., bandages, diagnostic kits, glucometers) reduced to 5% tax rate. | Major boost to affordability and insurance penetration; benefits patients, hospitals, and pharma companies. Highly advantageous for the middle class and vulnerable populations. |
| Automobiles | Rates reduced to 18% on small cars, motorcycles, buses, trucks, ambulances, three-wheelers, and uniform 18% on all auto parts. | Revives demand in entry-level segments; benefits manufacturers such as Maruti and Hero MotoCorp. Moderately advantageous, with ripple effects on logistics. |
| Construction and Infrastructure | Cement reduced from 28% to 18% tax rate. | Lowers building costs, aiding affordable housing and real estate growth. Beneficial for developers and end-buyers, though not as transformative as for essential items. |
| Renewable Energy | Rates cut to 5% on devices and parts for solar/wind energy manufacture. | Promotes green initiatives; advantages for companies in clean energy, aligning with sustainability goals. |
| Textiles and Handicrafts | Rates reduced to 5% on apparel below Rs. 2,500, handicrafts, marble/granite blocks, and intermediate leather goods. Corrections for inversion in manmade fibres. | Supports artisans and exporters; moderately beneficial, focusing on labour-intensive Micro, Small and Medium Enterprises (MSMEs). |
| Tobacco and Sin Goods | Increased to 40% tax rate on pan masala, gutkha, cigarettes, aerated beverages, etc., levied on Retail Sale Price. | Discourages consumption for public health reasons; revenue boost for government, but higher costs for consumers. |
The Fast Moving Consumer Goods (FMCG), agriculture and healthcare sectors are poised for the most substantial gains due to their direct impact on the average person and broad economic multipliers.
Status of the Service Industries
Service industries will receive moderate relief under GST 2.0, with changes effective from 22 September 2025. Key reductions include a 5% levy on hotel accommodations up to Rs. 7,500 per day and on beauty and well-being services (such as gyms, salons and yoga centres).
It has been specified that stand-alone restaurants cannot opt for an 18% GST rate with Input Tax Credit (ITC) by declaring themselves as a “specified premises”. Overall, services will shift to the 18% standard rate where not exempted or reduced, maintaining stability but with less sweeping cuts compared to goods. This supports tourism and personal services, benefiting urban consumers and small operators, although high-end services may see minimal change.
Process Reforms
Process reforms have also been announced during these changes, whereby automatic GST registration will be granted to applicants within 3 working days if they opt for the scheme and agree not to claim input tax credit (ITC) exceeding Rs 250,000 per month. These applicants will be identified by the system based on data analysis.
Likewise, provisional refunds will be issued by officers through a system-based risk evaluation for zero rated supplie,s and supplies with an inverted duty structure of 90%. This addresses sectors such as textiles (e.g., corrections for man-made fibres) and imitation Zari, where refunds were previously restricted. This change enhances cash flow, reduces working capital blockages,
Impact on Export Industries
Export industries receive targeted support through exemptions and clarifications. Notable changes include ad hoc Integrated Goods and Serices Tax (IGST) exemptions on natural cut and polished diamonds up to 0.25 carats (25 cents) under the Diamond Imprest Authorization Scheme, as well as parts and sub-assemblies for military and specialized equipment. Lower input rates in agriculture and textiles indirectly boost export competitiveness by reducing costs. The reforms maintain zero-rating for exports, ensuring full ITC refunds. Overall, this strengthens India’s global position in the export of gems, jewellery and Agri-exports, although the broader impact will depend on global demand. The focus on renewables also promotes green exports.
Compliances and Other Changes
The government also emphasized trade facilitation alongside rates. Key compliance updates include the operationalization of the Goods and Services Tax Appellate Tribunal (GSTAT) by the end of September 2025 for appeals, with hearings starting in December 2025. There will also be an extended filing limitation to 30 June 2026 for appeals.
The Principal Bench will act as the National Appellate Authority for Advance Rulings, thereby reducing litigation. Other changes include amending the valuation rules for lottery tickets and introducing process reforms to enable faster refunds and scrutiny. The government has issued FAQs to provide clarity. Tobacco products rates have been deferred until compensation cess loans are repaid. These measures promote cooperative federalism, digital integration, and ease of compliance, with businesses advised to update systems and maximum retail prices (MRPs) by 22 September 2025.
Conclusion
GST 2.0 is expected to make compliance simpler and improve the ease of doing business, driving growth in a climate of global economic uncertainty. It is also expected to boost the economy by offsetting the impact of 50% US tariffs. These changes represent a bold step toward a more efficient, equitable tax regime, fostering inclusive growth while addressing long-standing challenges. The rate cut and improved compliance will also offset the fiscal losses resulting from these changes. As the implementation unfolds, let us hope for a better India. In my opinion, stakeholders will realise its full potential in due course.
Author
CA R.L Kabra
Founder Chairman, ECOVIS RKCA, Mumbai, India
Email: rl.kabra@ecovis.in
ECOVIS RKCA Advisors Ltd.
400078 Mumbai
