The Indian tax system underwent a major transformation on September 3, 2025, when the 56th GST Council Meeting introduced sweeping reforms. The GST Council, chaired by the Union Minister of Finance & Corporate Affairs, Smt. Nirmala Sitharaman announced recommendations relating to changes in GST rates, providing relief to individuals, the common man, the aspirational middle class, and measures for facilitation of trade in GST.   

The Council announced wide-ranging reforms to improve transparency, simplify compliance, and make business easier, especially for small traders and entrepreneurs. The new GST rates will take effect from 22 September 2025. 

The aim of the 56th GST Council Meeting 

The GST council explicitly laid out its plans to lower the tax burden on common people with sweeping rate cuts and reduction in GST slabs, ease blocked working capital, and facilitate ease of doing business with automated refunds and registration process. 

Understanding the context behind these reforms 

India introduced GST in 2017 with ambitious goals, but problems became clear soon after. The original four-tier system with rates of 5%, 12%, 18%, and 28% caused confusion over which rate applied to different products and made compliance complicated. Companies had to spend a lot of time and money figuring out the correct rates, which led to disputes and legal issues. 

The textile industry showed these challenges clearly. Under the inverted duty structure, raw materials were taxed higher than finished goods, creating cash flow problems for manufacturers who had to wait for refunds. Other sectors, including pharmaceuticals and food processing, faced similar issues. 

How did the structure evolve from four tiers to three? 

In line with the announcement of Prime Minister Shri Narendra Modi on 15th August 2025 regarding “Next-generation GST reforms”, the government, in its 56th GST Council meeting, proposed changes in GST rates of various goods and services.  This change reduces complexity, addresses tariff concerns that impact the middle class, and positions India for stronger global competitiveness. The highlight of the reform is: 

• Personal care products drop from 18% to 5% GST. 

• Small cars see a rate reduction from 28% to 18%. 

• Health and life insurance become GST-exempt. 

• 90% provisional refunds for exporters from November 2025. 

• Automated GST registration within 3 days for eligible businesses. 

What is the newly introduced three-tier GST framework? 

The new tax architecture represents a fundamental shift in approach. Instead of the previous four-tier system, businesses will now operate under a streamlined three-tier framework: 

• Merit Rate (5%) covers essential goods and services that directly impact common citizens. This category includes daily necessities like personal care products, basic food items, and healthcare services. 

• Standard Rate (18%) applies to most goods and services, bringing a consistent tax treatment to the majority of business transactions. This reduces the many classification disputes that used to take up a lot of time and resources. 

• Premium Rate (40%) targets luxury goods and products with negative social impact, consolidating the previous 28% rate with applicable compensation cess to a single levy structure for items like luxury cars, tobacco products and premium motorcycle. 

How will these GST changes impact different industries? 

Description of Goods and Services	Earlier Rate	Revised rate
Goods
Military Transport	18%	Nil
Ship Launched Missile	18%	Nil
Rockets With Calibre More Than 100mm	18%	Nil
UHT Milk, Chena, Panner	5%	Nil
Pizza Bread, Khakhra, Chapathi or Roti	5%	Nil
Paratha, Parotta and Other Indian Breads by Any Name Called	18%	Nil
Condensed Milk	12%	Nil
Butter And Other Fats (i.e. Ghee, Butter Oil, Etc.)	12%	5%
Cheese	12%	5%
Namkeens, Bhujia, Mixture, Chabena and Similar Edible Preparations Ready for Consumption Form (Other Than Roasted Gram), Pre-Packaged and Labelled	12%	5%
Drinking Water Packed In 20 Litre Bottles	12%	5%
Beverages Containing Milk	12%	5%
Cocoa Butter, Fat and Oil	18%	5%
Chocolates And Other Food Preparations Containing Cocoa	18%	5%
All Goods i.e. Corn Flakes, Bulgar Wheat, Prepared Foods Obtained from Cereal Flakes	18%	5%
Pastry, Cakes, Biscuits and Other Bakers’ Wares, whether or not Containing Cocoa; Communion Wafers, Empty Cachets of a Kind Suitable for Pharmaceutical Use, Sealing Wafers, Rice Paper and Similar Product	18%	5%
Soups And Broths and Preparations Therefor; Homogenised Composite Food Preparations	18%	5%
Ice Cream and Other Edible Ice, whether or not Containing Cocoa	18%	5%
Other Non-Alcoholic Beverages	18%	40%
Pan Masala	18%	40%
Carbonated Beverages of Fruit Drink or Carbonated Beverages with Fruit Juice	18%	40%
Tobacco And Tobacco Products	18%	40%
Agriculture Product	12%	5%
Fertilizer	18%	5%
Coal And Coal Item	5%	18%
Renewable Energy Product i.e. Solar Cookers, Solar Water Heater and System Etc.	12%	5%
Textile Product i.e. Sewing Thread, Yarn of Manmade Staple Fibres and Other Related Products	12%	5%
Thermometers For Medical, Surgical, Dental or Veterinary Usage	18%	5%
Eraser	12%	Nil
Maps, Pencils, Pencils Sharpers and Various Stationery Products	12%	Nil
Tooth Powder, Candles, Tableware and Kitchenware of Wood, Umbrellas and Sun Umbrellas, Sewing Needles, Combs, All Goods- Napkins and Napkin Liners for Babies, Clinical Diapers	12%	5%
Talcum Powder, Face Powder, Hair Oil, Shampoo, Shaving Cream, Shaving Lotion, Aftershave Lotion, Toilet Soap, Toothbrushes	18%	5%
Air-Conditioning Machines, Dish Washing Machines, Television Sets, Monitors and Projectors	28%	18%
Petrol, Liquefied Petroleum Gases (LPG) or Compressed Natural Gas (CNG) Driven Motor Vehicles of Engine Capacity Not Exceeding 1200 cc And of Length Not Exceeding 4000 mm.	28%	18%
Diesel Driven Motor Vehicles of Engine Capacity Not Exceeding 1500 cc And of Length Not Exceeding 4000 mm.	28%	18%
Three Wheeled Vehicles	28%	18%
Motor Vehicles for The Transport of Goods [Other Than Refrigerated Motor Vehicles	28%	18%
Motorcycles of Engine Capacity (Including Mopeds) And Cycles Fitted with An Auxiliary Motor, With or Without Sidecars, of An Engine Capacity Not Exceeding 350 cc; Side Cars	28%	18%
Motor Vehicles with Both Spark-Ignition Internal Combustion Reciprocating Piston Engine and Electric Motor as Motors for Propulsion, of Engine Capacity Exceeding 1200 cc or of Length Exceeding 4000 mm	28%	40%
Motor Vehicles with Both Compression-Ignition Internal Combustion Piston Engine [Diesel-or Semi Diesel] And Electric Motor as Motors for Propulsion, of Engine Capacity Exceeding 1500 cc or of Length Exceeding 4000 mm	28%	40%
Motorcycles of Engine Capacity Exceeding 350 cc	28%	40%
Sports Goods and Toys	12%	5%
Services
Work Contract Services	12%	18%
Hotel Accommodation	12%	5%
Air Transport of Passengers Other Than Economy Class	12%	18%
Transport of Goods by GTA	5%  without ITC	5%  without ITC
Transport of Goods by GTA	12%  with ITC	18%  with ITC
Leasing or Rental Services, Without Operator	28%  With ITC	40%  with ITC
All Individual Health Insurance, Along with Reinsurance Thereof	18%	Nil
All Individual Life Insurance, Along with Reinsurance Thereof	18%	Nil
Admission To Casinos, Race Clubs, Any Place Having Casinos or Race Clubs, or Sporting Events Like the IPL.	28%	40%

The consumer goods sector and food processing industry 

The consumer goods sector is seeing mixed impacts. Personal care manufacturers are among the biggest winners. Products like soap bars, shampoo, hair oil, toothpaste, and shaving products have moved from 18% GST to 5%. This 13-point cut brings major cost savings that companies can either pass on to consumers or keep as higher margins.  

The food processing industry also benefits significantly. Items such as chocolates, ice cream, bakery products, packaged snacks, namkeens, instant noodles, and confectionery have shifted to the 5% slab. Regional processed food manufacturers now have stronger pricing power and better opportunities to compete in the mass market. 

Automotive sector  

• Small car manufacturers will see their tax burden drop from 28% to 18%, potentially reducing vehicle prices from ₹1,20,000 to ₹80,000. This reduction could stimulate demand in the mass market segment, benefiting small segment companies significantly. 

• Two-wheeler manufacturers producing motorcycles with engine capacity up to 350cc will benefit from the same rate reduction. This change particularly favours the commuter segment, which forms the backbone of India’s two-wheeler market. 

• Luxury vehicle manufacturers face increased taxation. Cars exceeding specified engine capacity and dimensions will now attract the 40% rate, representing a substantial increase from the previous structure. Premium motorcycle manufacturers also encounter this higher taxation, potentially affecting demand in the high-end segment. 

Electronic manufacturers 

Electronics manufacturers see significant relief in the white goods category. Air conditioners, television sets, and dishwashers move from the 28% to 18% bracket, potentially boosting demand in these categories.  

This change particularly benefits manufacturers targeting middle-class consumers who were previously deterred by high prices.  

Companies in the air conditioner market benefit from rate reductions during peak summer demand periods. Television manufacturers gain uniform 18% taxation regardless of screen size, simplifying their product portfolio management. 

Construction material suppliers 

Construction material suppliers face varied impacts. Cement manufacturers benefit from a rate reduction from 28% to 18%, potentially lowering construction costs across the economy.  

This change could stimulate housing demand and infrastructure development. Conversely, coal suppliers face rate increases of 5% to 18%, which affects power generation costs and industrial expenses. 

Healthcare Sector 

The complete GST exemption on individual health and life insurance policies represents a paradigmatic shift. Previously, 18% GST on insurance premiums created significant barriers to coverage expansion, particularly for middle and lower-income families. 

Insurance companies and health insurers can now offer more competitive pricing. Family health insurance policies that previously cost ₹15,000 annually with ₹2,700 GST now become available at the base premium amount. 

Pharmaceutical companies also benefit from reduced taxation on medicines and medical devices. Life-saving drugs for cancer and rare diseases become completely exempt, while other medicines see rate reductions from 12% to 5%. Medical device manufacturers gain from similar rate cuts, making healthcare more accessible nationwide. 

How will these reforms affect exports and international trade? 

The reforms significantly enhance India’s export competitiveness through faster refund mechanisms and reduced compliance costs.  

• The introduction of 90% provisional refunds for zero-rated supplies addresses a longstanding concern among exporters who previously waited months for GST refunds. 

• This improvement in working capital availability could boost export volumes across sectors. Textile exporters, who faced challenges due to inverted duty structures, will benefit from both rate rationalization and faster refunds. 

• The correction of inverted duty issues in the textile sector specifically addresses input-output tax rate mismatches that created cash flow problems. 

• Manufacturing exporters across sectors gain competitive advantages through reduced domestic costs and improved cash flows. This positioning supports India’s manufacturing competitiveness in global markets, potentially attracting more foreign investment in export-oriented industries. 

Note: The simplified tax structure also reduces compliance costs for multinational companies operating in India. Clearer rate classifications minimize the need for specialized tax expertise and reduce dispute resolution costs. 

What additional amendments did the GST Council recommend? 

Refunds for low-value export consignments to ease working capital for exporters. 

Optional simplified GST registration scheme: 

• Automated registration within 3 days for low-risk applicants. 

• Available if output tax liability ≤ ₹2.5 lakh/month. 

• Voluntary opt-in and opt-out flexibility. 

Simplified registration for small suppliers via e-commerce operators. 

• Amendment to IGST Act (Sec 13(8)): place of supply for intermediary services determined under general rule Sec 13(2). 

• Amendment to CGST Act (Sec 15): post-sale discounts need not be pre-agreed; credit note issuance sufficient for GST treatment. 

What are the revenue implications and fiscal dynamics? 

The reforms maintain revenue neutrality through carefully balanced rate adjustments. While some sectors benefit from rate reductions, others face increases that offset potential revenue losses. The government projects that increased consumption and better compliance will compensate for reduced rates in specific categories. 

State governments receive protection through compensation cess extensions until March 2026. This provision addresses concerns about revenue adequacy during the transition period. However, long-term fiscal sustainability post-2026 requires careful monitoring and potential adjustments. 

The phased implementation of tobacco product rate increases acknowledges the revenue requirements for clearing compensation cess obligations. This approach balances immediate reform benefits with fiscal responsibility, ensuring a smooth transition without compromising government finances. 

Conclusion 

The 56th GST Council Meeting is an important step for India’s economy. The new reforms fix some long-standing issues that made business growth difficult and also help India compete better globally. For businesses, this means lower costs, easier compliance, and better access to markets. It also creates chances for growth, innovation, and higher profits in different sectors. 

How successful these changes will largely depend on how well the government puts them to action and how quickly businesses adjust. Companies that adapt early will be in a stronger position in the future. 

India is still moving towards a simpler tax system, but this meeting marks a big milestone. With a clearer structure, better technology, and faster processes, the reforms set the stage for steady growth and stronger global competitiveness.