India’s GST 2.0 Reforms: Key Highlights, Rates & Impact from the 56th GST Council Meeting
Overview of GST 2.0 Reforms
- Strategic, multi-sectoral changes impacting small traders, large businesses, and individual citizens.
- Major focus on rate rationalisation, supporting common consumers, labor-intensive sectors, agriculture, health, and economic growth.
- Launch of new dispute resolution and refund mechanisms.
Simplified Tax Rate Structure
- Rationalisation of existing 4-tier GST rates into a new 2-rate system:
- Standard Rate: 18%
- Merit Rate: 5%
- De-merit Rate: 40% for select few goods/services (e.g., tobacco, luxury vehicles).
| Previous GST System | GST 2.0 Structure |
| 0%, 5%, 12%, 18%, 28% | 5%, 18%, 40% |
Major Rate Reductions & Exemptions
Insurance Sector
- GST Exemption for all individual life and health insurance policies
- Includes term, ULIP, endowment, family floater, senior citizen policies
- Makes insurance more affordable and increases coverage.
Healthcare & Medicines
- 33 life-saving medicines: GST reduced from 12% to NIL
- 3 chronic/cancer/rare disease medicines: GST from 5% to NIL
- GST on all other drugs and medicines: 12% to 5%
- Medical apparatus, devices: Reduced GST, some products from 18%/12% to 5% (glucometers, diagnostic kits, bandages, etc.).
| Health Sector Item | Previous GST | New GST |
| Life-saving medicines | 12%/5% | NIL |
| Other medicines/drugs | 12% | 5% |
| Medical equipment | 18%/12% | 5% |
Foods & Daily Essentials
- Ultra-High Temperature (UHT) milk: GST from 5% to NIL
- Chena/paneer, Indian breads: GST from 5% to NIL
- Packaged foods (namkeens, pasta, noodles, chocolates, coffee, butter, ghee): 12%/18% to 5%
- Common items (hair oil, soap bars, shampoos, toothbrushes, toothpaste, bicycles, kitchenware): 12%/18% to 5%
- Tableware, kitchenware, household articles: GST reduced
Agriculture & Labour-Intensive Goods
- GST on tractors, farm machinery, composting machines: 12% to 5%
- GST on handicrafts, marble, granite blocks, intermediate leather goods: 12% to 5%
Transportation & Consumer Electronics
- GST on air-conditioners, dishwashers, TVs (<32-inches), small cars, bikes ≤350cc, buses, trucks, ambulances: 28% to 18%
- Auto parts: Uniform 18%, three-wheelers from 28% to 18%
- Cement: 28% to 18%.
| Vehicles & Electronics | Previous GST | New GST |
| Small cars/bikes | 28% | 18% |
| TVs (<32 inch) | 28% | 18% |
| Cement | 28% | 18% |
Textile & Fertiliser Sector
- Correction of inverted duty structure:
- Man-made fiber: 18% to 5%
- Man-made yarn: 12% to 5%
- Sulphuric acid, nitric acid, ammonia: 18% to 5%
| Textile/FertilizerItem | Previous GST | New GST |
| Man-made fiber | 18% | 5% |
| Man-made yarn | 12% | 5% |
| Fertilizer chemicals | 18% | 5% |
Sector-wise Changes: Key Examples
Common-Man Items
- Tooth powder, candles, feeding bottles, umbrellas, kitchenware, bicycles, napkins, etc.: 12%/5%/18% to 5%/NIL.
Education
- Erasers, pencils, exercise books, maps, sharpeners: 12%/5% to NIL.
Renewable Energy & Environment
- Solar cookers, biogas plants, windmills, solar lantern/lamp, photovoltaic cells: 12% to 5%.
Important Dates for Implementation
- GST rate changes on services: Effective 22nd September 2025
- GST rate changes on goods: Effective 22nd September 2025 (except tobacco/pan masala/cigarettes products).
- For tobacco/pan masala/gutkha products: Existing rates and compensation cess continue until the full discharge of related loan/interest obligations.
Key Law and Compliance Reforms
GST Refunds & Appellate Tribunal
- 90% provisional refunds for inverted duty structure and exports, risk-based assessment.
- Goods & Services Tax Appellate Tribunal (GSTAT): To be operational by Dec 2025, enabling faster appeals.
- New registration scheme: Automated GST registration for small, low-risk businesses (within 3 working days).
- Simpler registration for small sellers using e-commerce platforms across states.
Changes to CGST/IGST Acts
- Post-sale discount rules: No prior agreements needed. Discounts now granted via credit notes; corresponding reversal of input tax credit by recipient.
- Intermediary services: Place of supply linked to recipient’s location, favoring export benefits for Indian service providers.
High-Impact Tables
GST Changes on Select Goods
| Sector | Example Items | Old GST | New GST |
| Food | Packaged namkeens, Bhujia, Noodles, Chocolates | 12%/18% | 5% |
| Health | Life-saving drugs | 12%/5% | NIL |
| Agriculture | Tractors, farm machinery | 12% | 5% |
| Electronics | ACs, TVs (<32 in) | 28% | 18% |
| Insurance | Individual policies | 18% | Exempt |
Services Sector Rate Changes
| Service | Previous GST | New GST |
| Hotel accommodation (<₹7500) | 12% | 5% (no ITC) |
| Beauty/Well-being services | 18% | 5% (no ITC) |
| Third-party insurance (goods carriage) | 12% | 5% |
Effective Date of Changes
The GST rate changes for goods and services, except for certain tobacco products (cigarettes, chewing tobacco like zarda, unmanufactured tobacco, and beedi), will be effective from 22nd September 2025. For these specified goods, the existing GST and compensation cess rates will remain until certain financial liabilities are discharged.
Registration Threshold & Notifications
- No change has been made to the GST registration thresholds.
- Revised rates will be notified officially through CGST rate notifications on the CBIC website.
Tax Rate Application and Time of Supply
- If the supply occurred before the rate change, but invoice is issued after, the tax liability is based on the payment or invoice date, whichever is earlier.
- Advances received before supply will be taxed as per the time of supply provisions.
Input Tax Credit (ITC) and Refunds
- ITC is allowed on inputs taxed at the prevailing rates when the supply is made.
- ITC accumulated before the rate changes can be used for payments until 21st September 2025; reversal of ITC will be required post rate change if supplies become exempt.
- Refunds for accumulated ITC due to inverted duty structure are allowed as per existing laws.
Impact on Stock and Transit Goods
- New GST rates apply only on supplies made after the change date, regardless of stock on hand.
- No cancellation or regeneration of e-way bills for goods in transit is required due to the rate change.
Specific Goods and Services Rate Changes
- UHT milk is exempted; plant-based milk drinks, including soya milk drinks, now attract 5% GST.
- Indian breads (roti, paratha, naan, etc.) are exempted, aligning similar goods under same treatment.
- Certain carbonated beverages have increased GST due to cessation of compensation cess.
- Differential GST rates on paneer (pre-packaged labelled paneer taxed, but other forms exempt) and clarification on natural vs artificial honey.
- Agriculture machinery mostly moved from 12% to 5% to balance benefits between producers and farmers.
- Medicines generally enjoy concessional 5% GST except specific nil rated items.
- Medical devices attract 5% GST to reduce healthcare costs, despite deepening inverted duty structure; refunds for ITC inversion provided.
Vehicles and Transport
- Reduced GST rates for small petrol, LPG, CNG cars up to 1200cc and diesel cars up to 1500cc to 18%.
- Mid-size and larger vehicles, including SUVs and utility vehicles exceeding certain size/engine specs, attract 40% GST.
- Three-wheelers, buses (10+ passengers), ambulances, goods transport vehicles, and trailers have reduced GST rates mostly to 18%.
- Motorcycles: up to 350cc taxed at 18%, above 350cc at 40%.
Job Work and Services
- Job work services related to pharmaceutical and leather goods attract reduced GST of 5%.
- Residuary job work services not covered specifically now attract 18% GST.
- Hotel accommodation up to Rs. 7,500 per unit per day charged at 5% without ITC.
- Beauty and physical well-being services (gyms, salons, barbers, yoga, fitness centers) now taxed at 5% without ITC.
- Transport services by goods transport agencies (GTA) and related are taxed at 5% with option to pay 18% with ITC.
Higher GST Rates on Luxury and Sin Goods
- Specified services like lotteries, betting, casinos, and admission to sporting events like IPL are taxed at 40%.
- Exemptions and concessions are maintained where appropriate to balance revenue and societal impact.
Policy Rationale
- Rate rationalization aims to keep similar goods/services at the same rates to reduce classification issues and disputes.
- GST rates are designed to provide relief to common man and labor-intensive industries without adversely affecting manufacturers.
- Exemptions are balanced to avoid increasing the effective cost due to non-availability of ITC.
- The system maintains provisions for refund of ITC on inverted duty structures to ensure tax neutrality.
- The Government of India has introduced new GST rate cuts and reforms to reduce costs and remove tax anomalies in many sectors like paper, leather, wood, handicrafts, commercial vehicles, tractors, food processing, textiles, toys, and packaging.
- A major relief for small and e-commerce exporters is the removal of the minimum value threshold for GST refunds on exports, allowing even low-value shipments to claim refunds. This will ease cash flow and working capital issues, simplify compliance, and boost participation in international trade.
- GST rate cuts, for example from 12-18% to 5% on key raw materials like paper packaging, textiles, leather, and wood, will lower production costs and make Indian products more competitive globally.
- Lower GST on trucks and delivery vans (from 28% to 18%) plus cheaper packaging materials will reduce freight, logistics, and overall supply chain costs.
- Reductions on toys and sports goods GST (from 12% to 5%) encourage domestic manufacturing, helping to replace imports and meet rising global demand.
- The reforms address inverted duty structures—where tax rates on inputs were higher than on outputs—especially in textiles and food processing, improving cash flows via smoother GST refunds.
- Eco-friendly products like bamboo, bagasse, and jute boards now attract lower GST rates, promoting sustainable growth.
- Overall, these changes will ease liquidity pressures on MSMEs and manufacturers, enhance export competitiveness, and ensure that cost benefits reach consumers.
- The reforms are a step towards making India a global manufacturing hub in sectors like textiles, tractors, food processing, auto components, and handicrafts, supporting the vision of Atmanirbhar Bharat.
- Industry experts have welcomed the measures, noting they strengthen the manufacturing base, reduce working capital blockages, and improve ease of doing business.
This GST rationalisation is designed to boost India’s economic growth by making businesses more competitive while benefiting the common consumer with lower prices and better job opportunities.
Next-Generation GST Reforms Boost India’s Textile Sector
The recent GST rationalisation announced by the 56th GST Council meeting marks a significant step toward strengthening India’s textile industry. These reforms aim to remove long-standing distortions and structural anomalies in the tax system, leading to lower production costs and increased competitiveness for Indian textiles in domestic and international markets.
Key highlights include a uniform GST rate of 5% for man-made fibres and yarns, correction of the inverted duty structure, and reduced GST on ready-made garments priced up to ₹2,500 per piece. This will stimulate demand, especially in tier-2 and tier-3 towns, support millions of artisans and weavers, and expand employment opportunities, particularly for women in garmenting sectors.
The reforms align with the government’s ‘5F’ vision—from Farm to Fibre to Factory to Fashion to Foreign—intended to make India a global textile powerhouse with a USD 350 billion market target by 2030. Support for handicrafts, handlooms, and carpets by reducing GST rates from 12% to 5% will further enhance rural livelihoods and preserve India’s rich textile heritage.
Complementary measures such as simplified refund processes, removal of low-value consignment thresholds, and easier GST registration for small businesses will reduce compliance burdens and support MSMEs in the sector.
In summary, these next-generation GST reforms represent a historic leap forward, boosting affordability, demand, exports, and overall growth of India’s textile economy while preserving its cultural legacy.
Conclusion: Impact and Future Outlook
These GST 2.0 reforms represent one of the most significant overhauls of India’s tax structure since its inception. The changes are designed to promote fairness, support small businesses, make daily necessities and healthcare more affordable, correct long-standing sectoral anomalies, and streamline compliance. Implementation begins September 22, 2025, with further simplifications and digital upgrades in the pipeline.
Author
CA Devesh Thakur
