The Finance Ministry proposed a transformative two-slab Goods and Services Tax (GST) structure to the Group of Ministers (GoM), aiming to simplify the current four-tier system of 5%, 12%, 18%, and 28% into ‘standard’ and ‘merit’ slabs, with special rates for select items.
This move, part of the “next generation” GST reforms announced by Prime Minister (PM) Narendra Modi during his 79th Independence Day speech, seeks to reduce the tax burden on daily-use and aspirational goods, positioning it as a “Diwali gift” for citizens by November 2025. The reforms target enhanced affordability, reduced compliance costs, and economic growth, particularly for small industries and MSMEs.
The current GST regime, implemented in 2017, taxes essential items at lower rates or exempts them, while luxury and demerit goods face the highest slab and a compensation cess, which will end on March 31, 2026. The Finance Ministry’s proposal addresses this transition by rationalizing rates for goods currently under cess, such as pan masala and cars, to ensure long-term fiscal sustainability. The GST Council, chaired by Finance Minister Nirmala Sitharaman and including state ministers, is set to discuss the GoM’s recommendations in September 2025, aiming for swift implementation within the fiscal year.
PM Modi, in his Red Fort address, emphasized three pillars for these reforms: structural changes, rate rationalization, and ease of living. The two-slab structure aims to minimize classification disputes, correct inverted duty structures—where inputs are taxed higher than outputs—and ensure rate stability to boost industry confidence.
The ministry also proposed technology-driven measures, including seamless GST registration for startups, pre-filled GST returns, and faster refund processing for exporters, to enhance the ease of doing business (EoDB). These steps are expected to stimulate consumption, support sectoral expansion, and align with the vision of a $10 trillion economy by 2047.
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The end of the compensation cess has created fiscal space, allowing greater flexibility to align tax rates, according to the ministry. Bihar Deputy Chief Minister Samrat Chaudhary leads the seven-member GoM, tasked with simplifying the rate structure, reviewing exemptions, and boosting revenues. Originally formed in September 2021 under then Karnataka CM Basavaraj Bommai, the panel submitted an interim report in June 2022, suggesting rate changes for select goods and services. The current proposal builds on this foundation, emphasizing cooperative federalism to forge a consensus with states for a transparent, inclusive GST system.
The reforms come amid economic challenges, including 50% US tariffs on Indian goods effective August 27, 2025, impacting exports like textiles and jewelry. By reducing taxes on essential goods and simplifying compliance, the government aims to bolster domestic consumption and support small businesses, aligning with PM Modi’s ‘Vocal for Local’ and ‘Atmanirbhar Bharat’ initiatives. The ministry’s commitment to a stable, predictable tax framework is designed to foster long-term industry planning and economic resilience.
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