Overview

• The reduction from four to three GST slabs makes everyday necessities like food items, medicines, and agricultural equipment more affordable by moving them to the 5% bracket.

• A new 40% tax bracket targets premium automobiles, luxury items, and harmful products like tobacco and aerated drinks, creating a more progressive tax system.

• The reform is projected to deliver a 0.5% GDP fiscal impulse by FY27, potentially boosting consumption-led growth across sectors like FMCG, automobiles, cement, and real estate.

India's second-biggest tax reform, following the initial launch of Goods and Services Tax (GST) has sent a shockwave across industries. The 56th GST Council meeting cleared GST 2.0 on September 3, 2025, fundamentally reshaping the indirect taxation system of the country by merging four rates into three. This path-breaking GST reform, which will take effect on September 22, 2025, aims to simplify compliance while redesigning consumption patterns across industries.

The new framework eliminates the old 12% and 28% bands, creating a simplified system with 5%, 18%, and 40% rates. The rationalization is more than bureaucratic simplicity; it's a strategic decision anticipated to provide a fiscal stimulus of around 0.5% of GDP by FY27. The move may potentially trigger an earnings upgrade cycle fueled by discretionary spending.

Let’s explore which sectors become cheaper and which ones become costlier based on the government's GST Reform 2025 document. 

Sectors Celebrating Relief: FMCG, Auto and More

The Fast-Moving Consumer Goods (FMCG) sector emerges as the primary beneficiary of this reform. Essential items, including hair oil, soaps, toothpaste, packaged foods like namkeens, noodles, chocolates, butter, and ghee, now fall under the reduced 5% merit rate. Staple foods like paneer, paratha, chapati, and UHT milk have been completely exempted from GST. This lowering from the earlier 12% rate will directly mean improved affordability and higher disposable income for consumers.

The cement industry gets huge relief as rates fall from 28% to 18%. This 10% point cut is likely to reduce construction costs by 3-5%, which would have a direct impact on the real estate industry and enhance housing affordability. The impact spreads to urban housing schemes and infrastructure developments.

The Automobile and electronics sectors witness a remarkable transformation. Small cars, motorcycles under 350cc, three-wheelers, air conditioners, and televisions above 32 inches move from the 28% bracket to 18%. Electric vehicles retain their concessional 5% rate, supporting the ongoing electrification drive. This strategic tax relief could potentially boost demand by 5-10% across automotive categories.

Agricultural machinery gets relief with tractors, tractor components, drip irrigation, and farm equipment shifting to 5% slab from 12-18%. This decrease is meant to improve farm productivity and modernization.

The insurance sector gains as life and health insurance become GST-free, eliminating the previous tax burden and potentially increasing insurance penetration across the country. 

Pharmaceuticals benefit from drugs and medicines for personal use, now taxed at 5% instead of 12%. Additionally, 33 life-saving drugs enjoy complete exemption, making healthcare more accessible.

Table Depicting Items and Sectors That Got Cheaper

Also Read: GST Rate Overhaul: What it Means for Inflation, RBI Policy, and Fiscal Deficit

Sectors Facing Higher Burden: Sin Goods and More

The reform imposes a penalizing 40% tax rate on luxury and sin products. Luxury cars, vehicles with more than 1,200cc engine size and 4,000mm length, and motorcycles of over 350cc, are now subjected to the highest rate. Private yachts, planes, and racing vehicles are also included in this category.

Beverage manufacturers producing aerated water, carbonated drinks, caffeinated beverages, and other non-alcoholic drinks face a 40% rate. Thus, greatly hiking the price of these discretionary products

Sin goods industries, including pan masala, cigarettes, and tobacco products, will make their way into the 40% category in due course. However, the introduction is pending certain conditions based on compensation cess requirements.

Premium apparel exceeding Rs. 2,500 faces increased taxation at 18% compared to the previous 12%, affecting the luxury fashion segment.

Table Depicting Items and Sectors That Got Costlier

GST Reform Impact

The GST reform creates a progressive tax structure where essential items become cheaper while luxury and harmful products bear higher tax burden. The simplified compliance framework reduces administrative costs for businesses, while the lower rates on essentials boost rural and urban consumption.

The cement rate cuts benefit the construction industry massively, from individual homebuyers to large infrastructure projects. Meanwhile, the agricultural focus through reduced machinery costs supports the government's farmer welfare objectives.

On the other hand, Financial sector companies, including banks and NBFCs, anticipate increased credit demand. This is because there is a possibility of higher disposable incomes driving consumption and housing demand.

GST 2.0: Implementation Timeline

The new GST rates become effective September 22, 2025, coinciding with Navratri (an Indian festival). However, tobacco-related products will continue to be taxed at existing rates until compensation cess obligations are fulfilled. The Central Board of Indirect Taxes and Customs shall implement administrative reforms, including a new mechanism for refund that permits a provisional refund of 90% for inverted duty structures.

The comprehensive GST reform is a calculated shift toward consumption-led growth, balancing revenue requirements with economic stimulation. While essential sectors celebrate reduced burden, luxury and sin good industries prepare for higher compliance costs in this new tax landscape.

Also Read: Stock Market Today: Sensex, Nifty Set for Higher Opening on GST Relief & Fed Rate Cut Hopes

Frequently Asked Questions

1. When do the new GST 2.0 rates become effective?
The revised GST rates take effect from September 22, 2025, for both goods and services. However, tobacco products like cigarettes, bidis, and chewing tobacco will continue under existing rates until the government fully clears all compensation cess loan obligations.

2. Which sectors benefit most from GST 2.0 rate reductions?
FMCG, cement, automobiles, electronics, insurance, pharmaceuticals, and agricultural machinery sectors are the primary beneficiaries. Essential consumer goods, small vehicles, air conditioners, televisions, and life-saving medicines now attract lower tax rates, making them more affordable for consumers.

3. What items will become more expensive under the new GST structure?
Luxury cars exceeding 1,200cc and 4,000mm length, motorcycles above 350cc, aerated beverages, premium apparel over Rs. 2,500, personal aircraft, yachts, and sin goods like pan masala face higher taxation under the new 40% bracket, making them costlier.

4. How will GST 2.0 impact construction and real estate costs?
The reduction in the cement GST rate from 28% to 18% is expected to lower overall construction costs by 3-5%. This significant decrease will improve housing affordability, benefit infrastructure projects, and potentially stimulate demand in the real estate sector.

5. Can businesses continue using existing input tax credits after rate changes?
Yes, businesses can continue utilizing input tax credits already available in their electronic credit ledger, even when their outward supplies now attract lower GST rates. The existing ITC remains valid and can be used for future tax liability payments as per regulations.