Simplifying tax slabs, no cess on life & health insurance: What reforms is GST Council likely to push through?

The Goods and Services Tax (GST) Council is meeting today (3 September). Chaired by Finance Minister Nirmala Sitharaman, the Council will convene in New Delhi today and tomorrow (4 September).

The GST Council is set to discuss a number of important issues, including the Centre’s proposed reform of the tax slabs, the expiring compensation cess and whether to exempt health and life insurance. This will be the 56th meeting of the powerful Council, comprising Sitharaman and finance ministers of Indian states and Union Territories.

The development comes against the backdrop of Donald Trump imposing a 50 per cent tariff on India — a 25 per cent levy plus an additional 25 per cent for buying Russian crude oil. But what can we expect from the GST Council meeting?

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Tax slabs

Much of the focus will be on reforming the GST tax slabs. Prime Minister Narendra Modi had announced a slew of ‘next-generation’ reforms during his Independence Day speech last month. He said this would be a ‘Diwali gift’ for traders.

Under the GST, which was launched in July 2017, goods are currently taxed under four brackets — 5 per cent, 12 per cent, 18 per cent and 28 per cent.

The Centre has proposed doing away with the 12 per cent and 28 per cent slabs — leaving goods to be taxed under a two-tier system of 5 per cent and 18 per cent. The remaining slabs will be classified as ‘merit’ and ‘standard’. The Centre has said that the idea behind these changes is to simplify the tax structure and make it easier for businesses to comply with the GST.

The Group of Ministers (GoM), which met earlier this week, has already given the Centre’s proposal for a two-slab GST the go-ahead. The government is aiming to offset any loss to the exchequer — estimated at between Rs 50,000 crore and Rs 80,000 crore — by boosting consumption. The government said that reforming the tax slabs — what it refers to as rate rationalisation — will at least partly negate the impact of Trump’s tariffs. Sources have said the new rates will likely take effect by 22 September.

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What becomes cheaper, what becomes more expensive

The Centre has said that over 90 per cent of goods in the 28 per cent bracket will be moved to the 18 per cent slab. This includes electronic items such as televisions, washing machines, refrigerators, air conditioners and dishwashers. Small cars with engines of 1,200cc and under, motorcycles under 350cc, and auto parts could also be shifted to this lower bracket. So could medicines, medical devices, ghee, nuts, drinking water, namkeen and non-aerated beverages.

The government has said that 99 per cent of the goods under the 12 per cent slab will be moved to the 5 per cent bracket. This includes goods used by Indians every day such as pencils, bicycles, umbrellas, hairpins, paneer, pizza bread, khakra, fruit juices, coconut water, butter, cheese, pasta, ice cream and tooth powder.

Hotel stays and movie tickets could also become cheaper. Solar cookers, maps, charts, notebooks and atlases could also be shifted into the 5 per cent category. GST on erasers, currently at 12 per cent, could be done away with entirely. Toothpaste could be moved from the 18 per cent category to the 12 per cent tax slab. Sulphuric acid, nitric acid and ammonia could be shifted from the 28 per cent slab to the 5 per cent slab.

However, synthetic yarns, man-made staple fibre yarns, carpets and handicrafts could become more expensive if they are moved from the 5 per cent slab to the 18 per cent slab. Apparel above Rs 2,500 could also be moved from the 12 per cent slab to the 18 per cent slab. Coal could be shifted from the 5 per cent slab to the 18 per cent slab — which could increase company costs and be passed on to consumers.

‘Sin tax’, life and health insurance

The GST might also witness the introduction of a ‘sin tax’ slab, where items such as liquor, tobacco, pan masala and cigarettes will be placed in the 40 per cent slab. These items, which are currently in the 28 per cent bracket, already attract an additional cess. Online gaming, horse racing, lottery and casinos will also fall under the 40 per cent bracket.

The government is also considering levying the 40 per cent tax on SUVs and luxury cars. The Centre is also mulling bringing electric vehicles (EVs) under the 5 per cent slab. A levy of 18 per cent could be placed on four-wheeled EVs priced between Rs 20–40 lakh.

The Centre has also proposed doing away with GST on life insurance and health insurance. There is an 18 per cent levy on these two products at the moment. The government has suggested a green energy cess and a health cess to make up for the compensation cess, which will be done away with from 31 October.

What could be the impact?

The reforms could have a positive impact on consumer sentiment and increase consumption. A recent report by SBI Research estimated that these reforms could boost consumption by Rs5.31 lakh crore — around 1.6 per cent of India’s GDP.

This is in line with the government’s desire to spur economic growth. Data released last week showed that India’s GDP grew by 7.8 per cent in the first quarter of FY 2025–26. The government had estimated a growth of 6.5 per cent. The government has also said these reforms are in line with the Prime Minister’s ambitions to boost India’s self-reliance.

India recently overtook Japan to become the world’s fourth-largest economy — behind the United States, China and Germany. There are reports that India could overtake Germany to become the world’s third-largest economy by 2027 or 2030.

However, the Opposition is likely to attack the government over these moves. Since the GST was introduced in July 2017, the Opposition has been citing a dent to state revenues. The Centre at the time had agreed to pay states revenue through a compensation cess, which is now expiring. The Opposition has claimed this could cause a loss of between Rs 85,000 crore and Rs 2 lakh crore per year. The Opposition will likely hold a meeting to discuss these GST reforms.

With inputs from agencies