On September 3, 2025, India's GST Council, led by Finance Minister Nirmala Sitharaman, approved a significant tax reform introducing a new two-slab system.
Introduction of the New GST System
The GST Council approved a two-slab system with tax rates of 5% and 18%, along with a special 40% rate for luxury goods. These changes will come into effect on September 22, 2025, aiming to streamline tax compliance and stimulate economic growth. Minister of Finance Nirmala Sitharaman announced that the reforms will exempt essential items and insurance, reducing complexities in the tax code.
Expected Outcomes of the Reform
The reform is projected to reduce government revenue by approximately ₹1.1 trillion annually, which is seen as manageable given the expected boost to consumption sectors. While some stakeholders anticipate positive outcomes, critics highlight potential short-term fiscal challenges. Former Finance Minister P. Chidambaram commented on the current design of GST, noting that the existing rates should not have been introduced.
Historical Context and Connection to 2017
The introduction of GST in 2017 replaced complex tax structures in India. The new reform aims to enhance compliance and aligns with past efforts to simplify tax regimes. Nirmala Sitharaman confirmed the move to a two-tier rate structure, which is expected to support economic growth by facilitating easier business operations.
The new tax reform in India, in the form of a two-slab GST system, which aims to stimulate domestic consumption, encompasses both benefits and challenges for the country's economic stability.
