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Published on:

August 19, 2025

Alankar Mishra

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Basics of GST

GST 2.0: India to Scrap 12% & 28% Slabs, Introduce 40% Levy on Sin Goods

India's Goods and Services Tax (GST) is about to undergo the largest reform since it was introduced in 2017. Under the GST 2.0 framework, the government will simplify the nomenclature to two rates: 5% and 18%, eliminating the 12% and 28% tax rates. Additionally, sin products will be taxed at the rate of 40%, as means of generating revenue and discouraging negative behaviour. This will likely allow the tax to be less cumbersome for consumers (less product classification issues, etc.) and likewise compliance will be easier.

Key Changes Under GST 2.0

The new GST will consist of three key elements:

1. Two Main Slabs

Just 5% and 18% will be there.

Almost 99% of items in 12% will move to 5%, while 90% of items in 28% will transition to 18%.

2. Get Rid of Memoranda of 12% & 28% Rates

For mid-market products like mobile phones, snacks, soaps, and cement will get cheaper.

Luxury High Finish goods like TVs, Refrigerators, and A/Cs will stabilise at 18% or less.

3. 40% Sin Tax Slab

Will only apply to 5-7 items: tobacco, pan masala, alcohol, luxury cars, and online gaming.

It is created to deter bad consumption while generating income once the compensation cess is drawn down.

4. Jewellery & Stones Unchanged

Jewellery will stay at 3%.

Precious and semi-precious stones at 0.25%.

What Will Fall Under the New Rates?

As per the suggested plan:

1. There will be a 5% tax on daily necessities like food, medications, stationery, and personal hygiene items.

2. Televisions, refrigerators, air conditioners, and other mid-range and high-end home appliances will make up less than 18%.

3. To reduce usage, sin items such as tobacco products and other health-risk commodities would be subject to a 40% GST.

4. To encourage the gem and jewellery business, jewellery will continue to be 3% and precious and semi-precious stones will stay at 0.25%.

Additional Items Getting Cheaper (Diwali Bonanza List)

The government is promoting this reform as a festive-season present with an extensive list of items expected to drop in price by Diwali 2025:

1. Air Conditioners

2. Cellphones

3. Snacks

4. Soaps

5. Cement

Why the Overhaul is Needed

Classification conflicts, ranging from whether a snack should be taxed as a namkeen or a biscuit to whether a prepared item is a paratha or bread, have been common since the introduction of the GST in July 2017. These murky areas have resulted in company uncertainty, compliance difficulties, and lawsuits.

GST 2.0 seeks to simplify classification and reduce slabs to:

1. Make compliance easier for companies.

2. Cut down on tax conflicts.

3. Reduce prices on necessities to promote consumption.

4. Increase economic activity by giving industry clarity.

Impact on Consumers

The new structure will probably result in constant prices for typical household equipment and cheaper necessary commodities for regular consumers. Sectors that currently pay 12% tax will see the most savings as it drops to 5%.

However, the 40% charge, which is intended to serve as a public health policy as well as a source of funding for the government, will make the cost of consuming sin foods higher.

Impact on Industries

1. Fast-Moving Consumer Goods (FMCG) & Retail

The items that previously had slabs that were 12% are now moving to 5%. With prices coming down, we expect volumes to rise.

2. White Goods or Consumer Durables

ACs and TVs moving to lower slabs could create festive demand.

3. Automobile Sector

Small cars could be put into the 18% slab, and offer lower rates than previous higher levels.

Luxury vehicles will face the sin slab imposed at 40%, which will keep them at a premium.

4. Gems & Jewellery

No changes here-industry remains unscathed with the 3% and 0.25% slabs in-place.

5. Tobacco & other sin industries

The cigarette and pan masala manufacturers are facing a headwind since the 40% tax dramatically increases the cost of their product.

Revenue & Economy Impact

1. The revamp will, as we estimate, will rather cost the exchequer around USD 20 billion in lost revenue each year.

2. But the government is banking on increased consumption and GDP growth (admittedly modest) (projected bump of 0.6 percentage points increase in GDP) to make up the difference.

3. Tax on sin goods at 40% means they will still be guaranteed some revenue stream even if they have cancelled the compensation cess.

State vs Centre Tussle

Certain states are apprehensive about revenue loss because of lower rate slabs and are also demanding flexibility in the ability to impose taxes on tobacco and alcohol, whereas the Central government prefers a uniform system of GST across the nation. This negotiation will be vital prior to rollout.

Implementation Timeline

A panel of ministers is scheduled to meet soon to finalise the details of GST 2.0. Before Diwali, the administration intends to make headlines by portraying the reform as a happy "tax relief gift" for the general public.

Conclusion

India's new GST reform is an ambitious effort to streamline, simplify, and implement equitable taxation. The government is combining the five slabs of the previous GST into two, eliminating the compensatory cess, and placing a very high tax on sin items to stifle the public interest demands of the revenue considerations.

If implemented properly, GST 2.0 could transform India's tax framework, reduce compliance costs, and increase system predictability for the consumers and the business community. In the coming months, we will have an idea of the extent to which the reforms are implemented and whether any changes will alter the economy.

FAQs

Q1. What is GST 2.0?

The planned Goods and Services Tax system redesign, known as GST 2.0, aims to simplify the tax structure by lowering the number of tax bands and streamlining compliance.

Q2. What are the new GST slabs under GST 2.0?

The existing 12% and 28% slabs will be replaced by two main slabs, 5% and 18%, under the new structure. Special charges will apply to some products, such as 40% for sin goods, 0.25% for precious stones, and 3% for jewellery.

Q3. Will the compensation cess also be removed?

Yes, GST 2.0 encourages dropping the compensation cess ahead of the statutory March deadline to further simplify the tax structure.

Q4. What is meant by ‘sin goods’ and why are they taxed at 40%?

Sin products are things like tobacco, pan masala and other things and services that are considered harmful to society or health. A 40% GST is supposed to act as a deterrent in conjunction with generating additional revenue for the government.

Q5. Will jewellery and precious stones be affected by this change?

No, the 3% tax on jewellery and the 0.25% tax on precious and semi-precious stones will not change, guaranteeing stability for the gem and jewellery sector.