GST Council Approves Two-Rate Model for India in 2025

September 15, 2025

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India - Next-generation GST Reforms Approved by the GST Council

In August, the Indian Prime Minister Shri Narendra Modi presented a next-generation GST reform, aiming to boost economic growth and create a more efficient, citizen-friendly system. Following this announcement, the GST Council held a meeting at the beginning of September, during which its members approved reforms that include rationalizing the GST rate, modifying GST exemptions, and adjusting applicable GST rates for specific sectors.

Key Next-generation GST Reform Measures

The GST Council approved a rationalization of GST rates and a shift from a complex four-tier system to a simpler two-rate model. In practice, this means that there will no longer be four GST applicable rates, but only two, a standard 18% and a merit rate of 5%, with only a few select goods facing a 40% demerit rate.

The primary focus of the proposed and adopted reform measures was on affordability and easing the burden for ordinary people, farmers, SMEs, and labour-intensive industries. Therefore, GST was removed entirely on life and health insurance policies, making coverage more affordable and accessible. Additionally, essential household items, such as soaps, shampoos, and kitchenware, will be subject to a 5% GST instead of the previously applicable 12% or 18%.

Basic food products, such as milk, paneer, and Indian breads, will be exempt from tax. Meanwhile, packaged foods like noodles, sauces, chocolates, and butter will be taxed at 5%. Services that improve daily life, such as gyms, salons, and yoga centres, will also experience relief by decreasing the applicable GST rate from 18% to 5%.

The reform also aims to improve dispute resolution and strengthen taxpayer rights. As part of the effort to reach this goal, it has been decided that the GST Appellate Tribunal will start accepting appeals by September 2025 and begin hearings by December this year.

Conclusion

The new GST rates will come into effect on September 22, 2025. Meanwhile, other measures, such as a simplified GST registration scheme for small and low-risk businesses, will take effect on November 1, 2025. This scheme will enable registration within three working days for those who are eligible. Considering the scale of the reform, the Indian government estimated that the cuts would result in a revenue loss of INR 480 billion (approximately USD 5.5 billion).

Besides the state budget, many private companies, such as those selling apparel and clothing accessories, including Zara and Marks and Spencer, as well as those selling fizzy drinks like Pepsi or Coca-Cola, could feel the adverse effects of the GST rate changes. On the other hand, companies such as Nestle, Toyota, LG, and Sony will benefit from rate cuts and rationalization, as well as insurance companies operating in the country.

Source: Ministry of Finance Press Release, Reuters, VATabout

What are the key changes in India’s next-generation GST reforms?

The reforms simplify the GST system by moving from four tax rates to two, with 18% as the standard rate and 5% as the merit rate, while a few goods will face a 40% demerit rate.

When will the new GST rates come into effect?

The new GST rates will take effect on September 22, 2025, with additional measures like the simplified GST registration scheme starting from November 1, 2025.

Which goods and services will become cheaper under the GST reform?

Life and health insurance will now be GST-free, while essential items like soaps, shampoos, kitchenware, gyms, salons, and yoga centres will see GST reduced to 5%

What food items will be exempt from GST under the reform?

Basic foods such as milk, paneer, and Indian breads will be fully exempt, while packaged foods like noodles, sauces, chocolates, and butter will attract a 5% GST.

How will the GST reform affect small businesses?

Small and low-risk businesses will benefit from a simplified registration scheme starting November 1, 2025, allowing GST registration to be completed in just three working days.

Which companies are expected to gain or lose from the GST rate changes?

Apparel and fizzy drink companies like Zara, Marks and Spencer, Pepsi, and Coca-Cola may lose out, while Nestle, Toyota, LG, Sony, and insurance companies are expected to benefit.

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