Finance Minister Approves New GST Structure Ahead of Festive Season, New Rates from Sept 22

In what comes as an early festive bonanza for Indians, the Goods and Services Tax (GST) Council on Wednesday approved the move to a simplified two-tier rate structure and exempt individual health and life insurance premiums from GST. 

The meeting, chaired by Union Finance Minister Nirmala Sitharaman, approved rate rationalisation with a focus on the common-man, labour-intensive industries, farmers and agriculture, health and key drivers of the economy. This comes just few weeks after Prime Minister Narendra Modi made this historic announcement of replacing the existing four-tier GST with just two rates — 5% and 18%.

The new rates will come in effect from September 22, the day of Navaratri and just few weeks before Diwali.

According to the Finance Minister, the reform was not just about rationalising rates. She said, “It’s also on structural reforms and for ease of living. We have corrected inverted duty structure problems. We have resolved classification-related issues and we have ensured that there is stability and predictability about the GST.”

What are the Major Changes?

The rate rationalisation move comes as a benefit for common man with the GST on household articles like soap, toothpaste, namkeen, chocolates and coffee being slashed from either 12 per cent or 18 per cent to 5 per cent.

In a similar manner, GST on handicraft and agriculture-related goods such as tractors and composting machines will fall from 12 per cent to 5 per cent. In addition to that, renewable energy equipment such as biogas plants and windmills will also attract 5 per cent GST instead of the earlier 12 per cent. 

In a significant move for the auto sector, GST on small cars, buses, trucks, ambulances, motorcycles below 350cc, three-wheelers, air conditioners, televisions and cement will be reduced from 28 per cent to 18 per cent.

Additionally, a special rate of 40 per cent will be applied on all tobacco-related products such as pan masala, cigarettes and bidi, as well as on aerated water, caffeinated beverages, carbonated drinks, mid- and large-sized cars, motorcycles above 350cc and aircraft for personal use.

"GST will be levied on the retail price instead of the transaction value for pan masala, gutka, cigarettes and other tobacco products. Tobacco and tobacco-related items will continue at the existing GST rate along with compensation cess until the loan and interest payment obligation for the cess is completely discharged,” Sitharaman further noted.

What comes as one of the most awaited reforms is the exemption of GST on all individual life and health insurance policies, down from the current 18 per cent. However, group insurance will continue to attract 18 per cent GST.

Items such as ultra-high temperature milk, paneer, and all Indian breads (roti and paratha) will now attract nil GST, down from 5 per cent. Cancer and rare disease drugs, along with 33 other life-saving drugs and medicines, will also attract nil GST, down from 12 per cent.

Duty Inversion Corrections, Opposition Voice Concerns

Sitharaman said that duty inversion had been corrected in the man-made textile sector, in the fibre-neutral policy and in the fertiliser sector.

As per revenue secretary Arvind Shrivastava, the net fiscal implication was expected to be ₹48,000 crore based on FY24 figures. “The rate rationalisation exercise would result in a buoyancy effect and will play a major role. In addition, there will be an effect on consumer behaviour—what people spend on and how much — which will be positively impacted by this exercise. We also expect compliance to improve because many disputes will be settled. We believe the restructuring will be fiscally sustainable for both the centre and the states,” he said.

Many states, particularly those ruled by Opposition parties, have voiced concerns that the abolition of the 12 per cent and 28 per cent brackets could significantly erode their revenues. They cautioned that any rationalisation exercise should be accompanied by a clear mechanism to compensate states.

As per sources, Karnataka, Punjab, and West Bengal pressed the Council to provide a formal estimate of the potential revenue loss from the restructuring and flagged the absence of clarity on how states would be protected. Telangana and Sikkim also voiced similar concerns. “Revenue protection remains the main contention even as there is broad agreement on simplification,” a person familiar with the discussion told Business Standard.