GST 2.0 rollout today; essentials to cost less

As the clock struck midnight on Sunday, India entered a new era of taxation with the rollout of next-generation Goods and Services Tax (GST) reforms from Monday, September 22, coinciding with the first day of the Navratri. Termed by Prime Minister Narendra Modi as a “double Diwali gift” for the common man, the reforms promise to ease household expenses while stimulating economic growth.

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Under the new structure, the majority of goods and services will be taxed at five per cent and 18 per cent, while a steep 40 per cent levy will apply to ultra-luxury and so-called “sin goods” such as aerated drinks, premium vehicles, pan masala, and tobacco products. However, items like tobacco, cigarettes, and pan masala will continue under the existing 28 per cent tax plus cess until outstanding loan obligations are settled.

The new structure, with a base 5 per cent on most daily needs and 18 percent on non-essentials is expected to bring major relief to middle class.

All individual life and health insurance policies have also been made GST-free under the revised system, reducing the burden on policyholders. Other exemptions include UHT milk, pre-packaged paneer and chhena, Indian breads such as roti, paratha and chapati, along with 33 essential medicines for cancer, rare diseases, and chronic conditions.

While the government anticipates a financial implication of approximately Rs 48,000 crore due to the reductions, it expects increased consumption, higher compliance, and a boost in growth to offset revenue losses.

An analysis by IDFC First Bank suggested categories such as clothing, footwear, transport, and communication will see the steepest decline in GST rates. It projected a nearly one percentage point drop in inflation over 12 months.

“Sectors which will see lower tax rates are processed food, medicines, medical equipment, FMGC consumer durables, small cars, two wheelers, cement. ...In case there is full pass-through of the tax cuts, headline CPI inflation could be lower by 1.0% (over 12 months). The actual impact could be lower at around 0.6-0.8 percentage points, assuming partial passed-through,” IDFC Bank report noted.

For a smooth transition, the government, in a notification issued on Thursday, allowed “voluntary" use of revised price stickers on goods, along with waiving the requirement for manufacturers and importers to publish revised prices in two newspapers. The government has also clarified that any packaging or wrapper printed with the old MRP, produced before the GST rate revision, can continue to be used until March 31, 2026, or until existing stock is exhausted.