New GST Slabs to Boost Demand as India Faces 50% US Tariffs

India has unveiled its most significant indirect tax reform since the launch of the Goods and Services Tax (GST) in 2017. The new structure—dubbed “GST 2.0”—will take effect on 22 September 2025, consolidating rates, cutting burdens on mass-consumption goods, and aiming to boost demand just as the economy grapples with slowing private investment and tariff-driven external pressures. The government aims to boost demand just as the economy grapples with slowing private investment and punitive US tariffs of 50% on Indian exports. The government hopes that the domestic relief will cushion households and businesses against these external shocks.

The GST Council’s overhaul stems from two persistent challenges: complexity and compliance. The earlier four-tiered system (5%, 12%, 18%, 28%) led to distortions, inverted duty structures, and mounting disputes between states and the Centre. At the same time, slowing consumption, especially in FMCG, autos, and household durables, has pushed policymakers to look for a demand-side boost.

By reducing slabs to two core rates—5% and 18%—plus a special 40% bracket for luxury and “sin” goods, the government seeks to simplify the regime and redirect household spending power toward growth-driving sectors.

What Changed?

Under GST 2.0, daily essentials and mid-market products—from soaps and toothpaste to small cars, two-wheelers, basic appliances, and insurance premiums—now face lower taxes. This is expected to directly cut prices, making consumption more affordable ahead of the festive season.

At the other end of the spectrum, items such as tobacco, e-gaming, coal, luxury cars, and high-value apparel have been moved into the 40% slab. This protects revenue and reflects the government’s intent to discourage socially or environmentally harmful consumption.

On the administrative side, faster MSME registration (within three days), automated refunds for exporters, and pre-filled GST returns aim to ease compliance, reduce working capital lock-ups, and support startups. The correction of inverted duty structures in textiles, footwear, and other labour-intensive sectors addresses long-standing industry grievances.

Implications for the Economy

For households, GST 2.0 offers a near-term consumption stimulus. We expect retail inflation to ease, cushioning consumers already strained by high borrowing costs. The relief is particularly pronounced for middle-class and rural households, where demand for lower-end autos, electronics, and FMCG goods has lagged.

For businesses, the reform improves supply chain efficiency, enhances predictability, and reduces litigation risk. Exporters and MSMEs benefit from speedier refunds and reduced compliance costs. In the medium term, these steps could attract greater FDI into consumer-driven industries by strengthening transparency and tax stability.

The fiscal arithmetic is less rosy. Official estimates suggest revenue foregone could reach INR 930bn annually, with INR 450bn recouped via higher sin tax collections, leaving a net shortfall of about INR 480bn. The government is betting on higher consumption and tax buoyancy to close the gap. The cess will be scrapped by October–November 2025 once compensation loans to states are repaid, ending a politically contentious chapter of GST’s early years.

Opposition-ruled states such as Kerala, Tamil Nadu, and West Bengal have flagged revenue losses and reiterated calls for compensation. Kerala alone expects an annual hit of INR 80bn. With the Centre refusing to extend transfers, Centre–state tensions could flare, complicating implementation. Compliance capacity, particularly in smaller states, will be tested as businesses adjust to the new system.

Outlook

India’s GST 2.0 is a decisive attempt at simplification and stimulus, positioning the country as a model for tax modernisation among emerging markets. By easing the burden on essentials while taxing luxury consumption, the reform aligns with the government’s broader “Aatmanirbhar Bharat” narrative. Its success, however, will hinge on execution: whether compliance gains offset fiscal losses, whether demand revival is broad-based, and whether Centre–state trust can be rebuilt. For now, GST 2.0 stands as both an economic shot in the arm and a political test of India’s federal compact.