GST Reform: How India’s Two-Slab GST System Could Reshape Consumption and Compliance

When India rolled out the Goods and Services Tax (GST) in 2017, it was hailed as the country’s biggest tax reform, promising to untangle a messy web of indirect taxes. But nearly eight years later, the four-tier GST system, split across 5%, 12%, 18%, and 28% slabs, has often left both consumers and businesses frustrated.

Now, the government is preparing for a bold reset. By Diwali 2025, GST could be simplified into just two main slabs—5% and 18%—with a hefty 40% reserved for luxury and sin goods. If implemented, this reform won’t just be about tax rates, it could reshape how Indians spend, how businesses comply and how the government manages its fiscal strategy.

What Does the GST Reform Mean?

Here is what the two-slab GST reform means for consumers, MSMEs and the government.

Price Impact

The shift of 99% of items from the 12% slab to 5% is expected to reduce prices on a wide range of daily-use goods. Packaged foods such as butter, ghee, namkeens, and dried fruits will see a 7% tax reduction. Medicines and medical equipment, currently taxed at 12%, will move to 5%, lowering healthcare costs. Apparel under ₹1,000, footwear, stationery, and bicycles will also benefit.

This reclassification could reduce household expenses by ₹3,000–₹5,000 annually for middle-income families, improving disposable income and boosting consumption.

MSME Compliance Simplification

MSMEs, which contribute 30% to India’s GDP and employ over 11 crore people , face significant compliance burdens under the multi-slab GST regime. The proposed two-slab structure will reduce classification errors and disputes.

MSMEs will benefit from faster refunds and pre-filled returns, especially those affected by inverted duty structures in textiles and spare parts.

Revenue Composition

Currently, 67% of GST revenue is derived from the 18% slab, while the 12% and 28% slabs contribute 5% and 14% respectively. The proposed reform will retain the 18% slab as the revenue anchor while shifting low-yield slabs to 5%.

S&P Global Ratings projects that while the fiscal deficit may temporarily rise by 0.2% of GDP in FY26, improved compliance and consumption could offset this within three years. The government expects a ₹2.4 lakh crore boost in demand, which could raise indirect tax buoyancy and stabilise revenue collection by FY28.

Impact of GST Reform on Different Sectors

Here is the list of sectors impacted by the proposed changes to GST rates.

Automobile Sector

Automobiles currently face a 28% GST plus cess, resulting in effective tax rates of 29%–50%. Under the reform, small cars under 1200cc and two-wheelers below 350cc will move to 18%, reducing prices by 7%–9%. For example, Maruti Suzuki’s Alto K10, priced at ₹4.23 lakh, could drop to ₹3.87 lakh, saving ₹36,000 per unit . This is expected to revive demand in entry-level segments, which have seen a decline in Q1 FY26. Commercial vehicles and tractors will also benefit, though correction of component tax rates is essential to resolve inverted duty issues.

Construction Material

Cement, taxed at 28%, contributes 4%–5% to housing costs. A reduction to 18% will lower prices by 7.5%–8%. This could improve real estate margins by 40–50 basis points and stimulate housing demand, especially in Tier 2 and Tier 3 cities. Steel, paints, and sanitary ware are also expected to shift to 18%, reducing input costs for developers . The reform aligns with the government’s push for affordable housing and infrastructure-led growth.

FMCG and Consumer Durables

FMCG items such as packaged snacks, bottled juices and personal care products, currently taxed at 12%, will move to 5%, reducing retail prices by 6%–7%. Consumer durables such as TVs, refrigerators, and washing machines will shift from 28% to 18%, possibly lowering prices by ₹3,000–₹5,000 per unit. Companies like Nestlé, Dabur, Voltas, and Havells are expected to benefit from improved margins and higher volumes.

Insurance and Financial Services

Life and health insurance premiums, currently taxed at 18%, may drop to 5% or nil under the reform. This would reduce annual premium costs by ₹2,500–₹4,000 for middle-income households. Insurance penetration could rise by 1.2 percentage points in FY26, driven by affordability and simplified compliance. Banks such as HDFC and ICICI may also see higher credit demand as disposable income increases, supporting double-digit loan growth in H2 FY26.

Sin Goods and Luxury Items

To offset revenue loss from lower slabs, the Centre proposes a 40% GST rate on sin goods such as tobacco, gutkha, pan masala, luxury cars, and online gaming . These items currently attract 28% GST plus cess, resulting in effective rates of 31%–50%. The new slab will consolidate taxation and reduce classification disputes. Tobacco alone contributes over ₹43,000 crore annually to GST revenue . Maintaining the total tax burden at 88% for tobacco ensures fiscal neutrality while discouraging consumption. The 40% slab is expected to cover only 5–7 items, preserving equity in taxation.

Conclusion

India’s proposed two-slab GST reform promises a simpler, more transparent tax system that could benefit both investors and consumers. Lower rates on essential goods and consumer durables are likely to boost demand, support MSME growth, and improve corporate margins. While sin and luxury goods carry higher rates to protect revenue, overall, the reform may enhance consumption, ease compliance, and create a more predictable fiscal environment, offering strategic opportunities for investment and market growth in the coming years.

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