Simplifying GST: The 2025 Reform and What's Left

When the Goods and Services Tax was introduced in 2017, it replaced many central and state taxes with one system. But it had several main rates: 5, 12, 18 and 28 percent, plus cesses. Critics said this complexity caused disputes and raised compliance costs.

The 2025 reform

In September 2025, the GST Council approved a major simplification, often called GST 2.0:

• Most goods moved into two main rates: 5 percent and 18 percent.
• The 12 and 28 percent slabs were largely removed.
• A higher 40 percent rate applies to luxury and “sin” goods such as tobacco products and some high-end cars.
• Many everyday items, including some foods and health items, became cheaper, and some were exempted.

The case for fewer rates

• Simplicity: fewer disputes over which rate applies.
• Lower compliance costs for businesses.
• Less misclassification: with fewer rates, firms have less incentive to label products to fit lower slabs.
• Consumer benefit from lower rates on common goods.

Concerns

• Revenue: lower rates could reduce tax collections, affecting both centre and states, which rely heavily on GST.
• Regressivity: consumption taxes take a larger share of income from poorer households, so rates on essentials matter.
• State autonomy: states gave up many taxing powers under GST.

What’s still outside GST

• Petroleum products such as petrol and diesel remain outside GST, taxed by central excise and state VAT. Including them would reduce cascading taxes but cost states significant revenue.
• Alcohol for human consumption is outside GST, a key revenue source for states.
• Electricity and some real estate transactions are also outside.

The ideal

Many economists recommend a system with one standard rate, a lower rate for essentials, and a broad base including fuel. Moving there involves difficult trade-offs between simplicity, revenue and fairness.