GST 2.0: Rate Rationalisation and the Path to Two-Slab Structure

For eight years, India’s Goods and Services Tax carried two reputations at once. Abroad, it was admired as one of the most ambitious tax consolidations any federal democracy has attempted. At home, it was the reason a cream bun and a plain bun could end up in different tax brackets. Both reputations were earned.

The 56th meeting of the GST Council, held in New Delhi on 3 September 2025, was meant to settle the argument, and it did so with unusual speed. Scheduled across two days, it finished in one. The Council scrapped the 12% and 28% slabs, kept 5% and 18%, and created a 40% rate for a short list of goods nobody was going to defend in public: pan masala, aerated drinks, luxury cars, high-capacity motorcycles. Finance Minister Nirmala Sitharaman described the exercise as structural reform rather than a rate tweak. Most changes took effect on 22 September 2025, the first day of Navratri, which was not an accident of scheduling.

Nearly a year of collections data has come in since. It is now possible to say something more useful than “cheaper toothpaste.”

What actually moved

The scale was larger than the headline suggests. Going by KPMG’s reading of the Council’s annexures, rates changed across 391 categories of goods and 16 categories of services, with IGST on 20 categories of goods taken to nil.

The direction was relentlessly downward for household spending. Hair oil, shampoo, soap, toothpaste and shaving cream fell from 18% to 5%. Butter, ghee, cheese, namkeen and bhujia moved from 12% to 5%. UHT milk, paneer, roti and paratha went to nil. Air conditioners, televisions and dishwashers came down from 28% to 18%, as did small cars and motorcycles up to 350cc. Individual life and health insurance premiums — for years the most politically awkward line in the schedule — were exempted outright.

Two structural fixes mattered more than any single rate. Manmade fibre and yarn, taxed at 18% and 12% while the finished fabric attracted 5%, were both brought to 5%, ending an inverted duty structure that had been quietly draining working capital out of the textile chain. Fertiliser inputs such as sulphuric acid, nitric acid and ammonia dropped from 18% to 5% for much the same reason.

Alongside the rates came process reform that drew less attention and may prove more durable: risk-based provisional refunds on zero-rated supplies, removal of the threshold for refunds on low-value export consignments, and an optional simplified registration scheme granting registration within three working days to small and low-risk applicants, live from 1 November 2025.

The arithmetic of giving things away

The Centre put the fiscal cost at ₹48,000 crore, roughly 0.13% of GDP, calculated on FY24 consumption. That net figure conceals its own workings: an estimated ₹93,000 crore of revenue foregone through rate cuts, offset by about ₹45,000 crore recovered as goods migrated from 28%-plus-cess into the new 40% bracket.

Independent economists were less relaxed. Estimates attributed to Emkay Global, HSBC and Bernstein placed the annual net loss between ₹1 lakh crore and ₹1.5 lakh crore, on the argument that the official number assumed static consumption and understated the full-year effect. Several states had flagged losses of ₹80,000 crore to ₹1.5 lakh crore before the meeting even began. They voted for it anyway, and the Council recorded the decision as unanimous.

“A tax cut is a bet on behaviour. The Council wagered that Indians would buy enough extra to cover the gap — and the first year’s numbers suggest the bet was close, but not clean.”

What the collections actually show

FY 2025-26 closed with gross GST collections of ₹22.27 lakh crore, against ₹22.08 lakh crore in FY 2024-25. That is a year of essentially flat nominal growth — a first for GST outside the pandemic.

The composition tells you more than the total. Domestic collections fell 2.6% to ₹16.32 lakh crore, while import-related GST rose 11.7% to ₹5.95 lakh crore. Part of the domestic decline is arithmetic rather than economics, since the compensation cess was being wound down through the year. But not all of it is.

FY27 has opened better. April 2026 produced the highest monthly collection on record at roughly ₹2.43 lakh crore. The first quarter closed at ₹6.32 lakh crore, up 8.4%. July 2026 brought in ₹2,11,205 crore, up 15.4% year on year, taking cumulative April–July collections to ₹8.43 lakh crore, up 10.1%.

Read the July split carefully, though. Domestic gross collections grew 10.1%; import-related collections grew 28.8%. In June the gap was wider still, with domestic up 6.5% against imports up 34.6%. The recovery in headline GST is being carried disproportionately by the customs counter. Domestic consumption is growing, certainly, but closer to the pace of nominal GDP than to the ₹20 lakh crore of “additional” consumer spending that three Union ministers projected in October 2025.

There is a genuine consumption story in the early data — government estimates put the growth in taxable value of GST supplies at 15% during September–October 2025, against 8.6% in the same two months a year earlier. Whether that was durable demand or deferred purchases piling up between the Prime Minister’s 15 August announcement and the 22 September switchover is still being argued about.

The effective average GST rate, meanwhile, has drifted from roughly 14% down to about 11%, against something near 15% at the 2017 rollout. That is a deliberate and consistent policy tilt. It also has a cost that has to be found somewhere.

The two slabs that are actually six

“Two-slab structure” is useful shorthand and mildly untrue. A business invoicing in India today may apply nil, 0.25% on rough diamonds, 3% on gold and silver, 5%, 18% or 40%, with composition rates running alongside. The Council left Chapter 71 deliberately untouched, on the reasoning that gold functions as household savings rather than discretionary luxury.

Petroleum products and electricity remain outside GST entirely. That is the largest piece of unfinished business on the agenda: the exclusion breaks the input tax credit chain and quietly cascades cost into every manufactured good in the country. Until it is addressed, “One Nation, One Tax” remains a slogan with an asterisk.

The tobacco endgame

Sin goods were carved out of the September 2025 switchover for a specific reason: compensation cess proceeds were still servicing loans raised on behalf of states during the pandemic. Once those obligations were discharged, the transition followed on 1 February 2026.

From that date most tobacco products and pan masala moved to 40% GST, levied on retail sale price rather than transaction value, while bidis were placed at 18% and compensation cess on these entries went to nil. To hold total incidence steady, Parliament approved an additional excise duty on tobacco of ₹2,050 to ₹8,500 per thousand sticks depending on length, plus a Health Security and National Security Cess on pan masala assessed on declared production capacity.

The shift to RSP-based valuation is the sleeper change here. It decouples tax from the actual sale price, which will reshape dealer margins across the trade in ways the rate table does not reveal.

What the 57th Council has to finish

As of mid-August 2026 the 57th GST Council meeting had not been formally convened, despite the Council’s own rules of procedure calling for a meeting each quarter. Kolkata has been discussed as the venue, which would be a first for the city, with an agenda centred on registration, refunds and audit rather than rates.

Three items deserve priority. The first is migration of stranded compensation cess credits: Grant Thornton Bharat estimates automobile dealers alone are carrying close to ₹2,500 crore in balances, with coal and aerated beverages similarly caught. The second is the artificial distinction between goods and services for refund purposes, which continues to lock up exporter working capital for no defensible reason. The third is clarity on Section 9(5) for platform businesses, where divergent advance rulings have left aggregators guessing at their own liability.

The compliance architecture, meanwhile, has hardened considerably. GSTR-3B is now hard-locked, the Invoice Management System governs input tax credit with deemed acceptance, and the three-year filing bar is live. The GST Appellate Tribunal began accepting appeals from 30 September 2025, and its Principal Bench took on the role of National Appellate Authority for Advance Ruling from 7 May 2026.

A provisional verdict

GST 2.0 did what rate rationalisation was always supposed to do. It removed an entire category of dispute that generated litigation without generating revenue. Arguments over whether a product is a namkeen or a snack no longer carry a six-percentage-point consequence, and that is a permanent gain that will not show up in any collections table.

What it has not yet done is prove the revenue case. One flat year followed by an import-led recovery is not a verdict. The honest position, eleven months in, is that the simplification is real and irreversible while the buoyancy is still under negotiation — and that the next Council meeting, whenever it is finally called, will be judged on plumbing rather than headlines.

Sources

• GST Council — 56th Meeting Press Release (Ministry of Finance) — https://gstcouncil.gov.in/sites/default/files/2025-09/press_release_press_information_bureau_0.pdf

• PIB — FAQs on the decisions of the 56th GST Council — https://www.pib.gov.in/PressReleasePage.aspx?PRID=2163560

• PIB — FAQs-2 on the decisions of the 56th GST Council — https://www.pib.gov.in/PressReleasePage.aspx?PRID=2167151

• GST Council — official website — https://www.gstcouncil.gov.in/

• GSTN — Monthly GST revenue data (April 2026) — https://tutorial.gst.gov.in/downloads/news/for_publishing_monthly_gst_data_for_apr_2026.pdf

• KPMG India — Flash News: Recommendations of the 56th GST Council meeting — https://www.in.kpmg.com/taxflashnews/KPMG-Flash-News-Recommendations-of-56th-GST-Council-meeting.pdf

• EY India — GST Council announces major rate rationalization and trade facilitation measures — https://www.ey.com/en_in/technical/alerts-hub/2025/09/gst-council-announces-major-rate-rationalization-and-trade-facilitation-measures

• Grant Thornton Bharat — 57th GST Council meeting: six reforms that can define GST’s second decade — https://www.grantthornton.in/insights/articles/57th-gst-council-meeting/

• Business Standard — GST Council clears 2-slab structure: what gets cheaper, what gets expensive — https://www.business-standard.com/economy/news/gst-council-two-slab-5-18-percent-what-gets-cheaper-expensive-sin-tax-125090301672_1.html

• Business Standard — Gross GST collections rise 15% in July, led by strong import revenues — https://www.business-standard.com/economy/news/gst-collections-rise-15-percent-to-rs-2-11-trillion-in-july-126080100511_1.html

• Business Standard — Revenues take a hit in first full month of GST 2.0 — https://www.business-standard.com/amp/economy/news/tax-turbulence-revenues-take-a-hit-in-first-full-month-of-gst-2-0-125120101323_1.html

• Business Standard — GST collection jumps around 10% in FY25 (₹22.08 lakh crore baseline) — https://www.business-standard.com/amp/markets/capital-market-news/gst-collection-jumps-around-10-in-fy25-125063000774_1.html

• ANI — Gross GST revenue rises 15.4% to ₹2.11 lakh crore in July 2026 — https://aninews.in/news/business/gross-gst-revenue-rises-154-to-rs-211-lakh-crore-in-july-import-collections-drive-growth20260801112747/

• News on AIR — GST collections cross ₹2 lakh crore in March 2026 — https://www.newsonair.gov.in/gst-collections-rise-8-8-to-over-rs-2-lakh-cr-in-march/

• News on AIR — Additional excise duty on tobacco notified from 1 February 2026 — https://www.newsonair.gov.in/govt-notifies-february-1st-as-date-from-which-additional-excise-duty-to-be-levied-on-tobacco-products/

• HDFC — GST 2.0: Driving Consumption-led Growth Revival (fiscal impact estimates) — https://hdfc-tru.com/resources/primer/primer-listing/gst-2-0-driving-consumption-led-growth-revival/

• Policy Circle — GST 2.0: consumption push risks long-term growth — https://www.policycircle.org/policy/gst-2-0-consumption-gdp-growth/

• The Federal — One month of GST 2.0: consumption zooms; will the economy grow? — https://thefederal.com/category/business/1-month-of-gst-2-consumption-zooms-will-economy-grow-212578

• Taxo — GST compensation cess on tobacco to end on 1 February 2026 — https://taxo.online/latest-news/01-01-2026-gst-compensation-cess-on-tobacco-to-end-on-feb-1-orders-govt-new-laws-notified/

• SRGA Global — GST 2.0: Demand vs Deficit (independent revenue-loss estimates) — https://www.srgaglobal.com/gst-2-0-demand-vs-deficit-part-ii-of-iii