New GST Rates 2025: Major Overhaul With Two Slabs, Cheaper Goods, and 40% Tax on Luxury

New GST Rates: Major Tax Reform Announced by GST Council

The Indian taxation system is set to witness one of the most sweeping reforms since the Goods and Services Tax (GST) was first introduced in 2017. In a landmark decision, the GST Council, chaired by Finance Minister Nirmala Sitharaman, has announced a drastic overhaul of the tax structure.

From September 22, 2025, GST will move from the earlier four-tier system—5%, 12%, 18%, and 28%—to a simplified two-slab structure of 5% and 18%, along with a new 40% slab for luxury and demerit goods. This reform is being described as a Diwali gift for the middle class, farmers, and small businesses, while also rationalizing the tax system for easier compliance.

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Background: Why Did the Government Change GST Rates?

The GST system has often been criticized for being complex, with multiple slabs causing confusion among businesses and consumers. Higher tax rates on essential items like toiletries, packaged food, and appliances added to household costs, while luxury goods and sin items continued to benefit from loopholes.

The government, in consultation with economists and industry experts, decided that a simplified system would reduce litigation, improve tax compliance, and boost consumer demand during the festive season.

Additionally, with inflationary pressures and a need to revive consumption, this reform is expected to provide a direct push to the economy, even though it might result in a short-term revenue loss of approximately ₹48,000 crore.

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Key Highlights of the New GST Rates

1. Two Main Slabs – 5% and 18%

• 5% Slab: Most essentials including packaged food, toiletries, medicines, dairy products, pesticides, tractor parts, and tyres will now attract just 5%.
• 18% Slab: Consumer durables like air conditioners, televisions, refrigerators, washing machines, and small cars will now fall under 18% (down from 28%).

2. New 40% Slab for Luxury & Sin Goods

• Luxury cars, motorcycles above 350cc, tobacco products, and premium event tickets will now attract 40% GST.
• This move ensures that affordability is enhanced for middle-class households, while ultra-luxury and demerit items continue to be taxed heavily.

3. GST-Free Insurance Services

In a major relief for families, life and health insurance products are now exempt from GST, making them significantly more affordable.

4. Relief for Farmers

The agricultural sector is one of the biggest beneficiaries. GST on tractors, tractor parts, tyres, fertilizers, and pesticides has been brought down to 5%, reducing input costs for farmers.

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What Gets Cheaper and What Gets Costlier?

Category / Item	Old GST Rate	New GST Rate	Effect
Packaged food, medicines, toiletries	12%–18%	5%	✅ Cheaper
Dairy products (paneer, curd, ghee)	5%–12%	5%	✅ Cheaper
Life & health insurance	18%	0%	✅ Cheaper
ACs, TVs, refrigerators, washing machines	28%	18%	✅ Cheaper
Small cars and bikes (≤350cc)	28%	18%	✅ Cheaper
Tractors, tyres, pesticides	12%–18%	5%	✅ Cheaper
Luxury cars, superbikes (≥350cc)	28% + cess	40%	❌ Costlier
Tobacco, pan masala, gutka	28% + cess	40%	❌ Costlier

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Impact on Consumers and Economy

• Consumers: Families will feel direct relief in household budgets with reduced costs on food items, medicines, and appliances.
• Businesses: A simpler tax structure will lower compliance costs and disputes, boosting ease of doing business.
• Insurance Sector: Removal of GST on insurance is expected to increase policy penetration, ensuring more people are covered.
• Automobile Industry: Small cars and two-wheelers becoming cheaper will boost auto sales ahead of the festive season.
• Economy: Economists predict the reform could reduce inflation by up to 1.1% and drive demand growth in rural as well as urban markets.

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When Will the New GST Rates Apply?

The new GST rates will be effective from September 22, 2025, coinciding with the start of Navratri. This timing is strategic, as it gives a strong boost to festive shopping and demand recovery.

However, some products like tobacco and gutka will continue under the current GST + compensation cess until a detailed framework for the 40% slab is finalized.

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Expert Opinion

According to tax experts, this GST reform is the biggest overhaul since 2017, simplifying the system and making it more consumer-friendly. While the government may see short-term revenue loss, the long-term benefits of higher compliance, stronger demand, and reduced inflation outweigh the risks.