The Goods and Services Tax (GST) Council has unveiled a sweeping rate rationalisation exercise—popularly dubbed GST 2.0—with the twin objectives of simplifying India’s complex tax structure and nudging consumer behaviour towards upgraded, higher-quality products. The reforms are also expected to bring relief to taxpayers while posing fresh challenges for revenue management by the Centre and States.
Key Reforms in GST 2.0
The new rate structure covers a wide range of everyday goods and services:
- Essential Foods Exempted: Items such as ultra-high temperature (UHT) milk, paneer (Indian cottage cheese), roti, parotta, and other Indian breads are now tax-free. Paneer, largely produced in the small-scale sector, was specifically exempted to promote the domestic cottage cheese industry.
- Packaged Foods at 5%: Popular packaged goods—namkeens, noodles, sauces, chocolates, butter, ghee, pasta, coffee, and preserved meat—will now attract only 5% GST, reducing discrimination against packaged items.
- Consumer Durables Cheaper: Air-conditioners, televisions, washing machines, and other household appliances will see reduced GST, encouraging higher consumption in the middle-class segment.
- Insurance Relief: Individual life and health insurance premiums are exempted, while group policies retain the 18% GST.
- Automobiles: Small cars (under 4 meters with smaller engine capacities) and motorcycles below 350cc now fall under the 18% tax bracket, down from the earlier 28%. However, larger motorcycles above 350cc have been moved to a higher 40% GST slab, categorising them alongside “sin goods” like tobacco and pan masala.
Behavioural Nudge and Consumption Push
Officials behind the reforms emphasise that GST 2.0 is more than a fiscal measure—it is intended to encourage consumption shifts. For instance, cheaper packaged foods may push consumers towards branded and higher-quality items. Similarly, lower tax rates on small cars and two-wheelers could stimulate sales in sectors that have been sluggish for the past two years.
A senior official likened this to earlier shifts in India’s FMCG market, such as the introduction of shampoo sachets that transformed consumption by making products more affordable and accessible. “Small nudges like these often lead to larger behavioural changes,” the official explained.
Timing and Economic Impact
The GST reforms come at a strategically important time—just ahead of the festive season and before the model code of conduct kicks in for the Bihar elections. The government hopes the rate cuts will translate into higher consumer spending and industry growth.
However, questions remain over whether companies will pass on the benefits of tax reductions to consumers in the form of lower prices. Already, in anticipation of the changes, FMCG dealers delayed stocking products, while consumers postponed purchases of durables and vehicles.
Challenges Ahead
While GST 2.0 simplifies the tax structure and eases classification disputes (such as those between roti, paratha, and other breads), it also creates new tensions. For example, higher taxes on premium motorcycles could dampen aspirations in a segment that has strong consumer demand. Similarly, India’s export-focused automobile manufacturers argue that the small-car norms are misaligned with global standards, potentially affecting competitiveness.
Despite these challenges, policymakers maintain that GST 2.0 marks an important step toward a more transparent and growth-oriented tax system—one designed not just to raise revenue but to shape consumer choices and promote economic dynamism.
Read More: GST Reforms Termed Transformative, Assured to Ensure Tax Certainty: CBIC Chief
