The recent overhaul of India’s Goods and Services Tax (GST), dubbed “GST 2.0,” is more than a simple tax reform; it is a major political and economic move. With the Bihar elections on the horizon, the restructuring of the indirect tax regime appears to be a calculated effort to appeal to key voter segments, including the middle class, farmers, and consumers focused on health and domestic goods.
The new system simplifies the existing four-tier structure of 5%, 12%, 18%, and 28% into just two core slabs: 5% for essential goods and 18% for most other goods and services. A new 40% rate has also been introduced for luxury and “sin goods.” These changes are set to take effect on September 22, 2025.
Middle Class: Aspirational Goods and Daily Essentials Get Cheaper
The middle class, which constitutes a significant portion of the Indian electorate, stands to be a major beneficiary. The government has slashed GST rates on a wide range of goods associated with middle-class life. Items like small cars, LED TVs, and air conditioners have seen their tax rates reduced from 28% to 18%.
Daily-use items, including soaps, shampoos, hair oil, and toothpaste, will now be taxed at just 5%, a significant reduction from their previous 12-18% rates. The reform also addresses major household expenses by making life and health insurance premiums entirely GST-exempt. Furthermore, 33 life-saving drugs have become tax-free, and most other medicines, diagnostic kits, and thermometers are now taxed at a reduced 5%.
Farmers and Rural India: Lower Costs for Livelihoods
India’s large agrarian community is another clear target of the reform. GST rates have been lowered on items crucial to rural livelihoods, such as farm equipment, which moves from 12% to 5%. Packaged food products like butter, ghee, paneer, and dry fruits have also been shifted to the 5% slab. The government’s decision to maintain protection for the agriculture and dairy sectors in recent trade talks with the U.S. further underscores the political importance of this voter base.
Promoting ‘Healthy India’ and ‘Atmanirbhar Bharat’
The GST overhaul aligns with two other key government initiatives:
- Healthy India: A new 40% “sin tax” has been imposed on products like tobacco, gutkha, and aerated/sugary beverages, reinforcing the government’s push for healthier lifestyles by making unhealthy choices more expensive.
- Atmanirbhar Bharat: By rationalizing rates and favoring domestically made goods, the reform aims to boost local industries and reduce reliance on imports. This move is expected to benefit small businesses and artisans.
The decisions, which were unanimously approved by the GST Council, are seen as a strategic boost to domestic consumption ahead of the festive season and a way to cushion the economy against global uncertainties, such as a 50% tariff recently imposed by the U.S. on Indian exports.