The government’s announcement of Goods and Services Tax (GST) rationalisation under GST 2.0 signals a major change in India’s economic approach, moving from capex-led spending to a consumption-driven model, according to a report by Axis Securities.“The government has now shifted gears from capex-oriented spending to consumption-led spending,” the brokerage said, adding that the February 2025 Budget had already started this transition by introducing tax reliefs for rural households and the middle class.

As per news agency ANI, the report noted that over the last decade, infrastructure projects like roads, bridges and metro networks defined government policy. However, GST 2.0, approved in the 56th GST Council meeting on September 3, marks a new phase aimed at boosting demand. The reforms rationalise the structure by reducing slabs from four to three, scrapping the 12% and 28% categories. Most items now fall under 5% and 18%, while a 40% slab is reserved for sin goods. Certain essentials have been placed under a Nil GST rate to directly spur consumption. These changes will take effect from September 22, coinciding with Navratri’s first day.

As per ANI, Axis Securities said the move is expected to benefit MSMEs and SMEs and revive credit growth, while boosting consumer demand in sectors such as durables, retail, FMCG, automobiles, cement, real estate, and building materials. The report added that higher discretionary income will strengthen the consumer discretionary segment, eventually reviving private capex, which has remained weak.Union commerce and industry minister Piyush Goyal also described the GST reforms as “game-changing” and the “biggest reform since independence,” reported news agency PTI. He said the move would support demand across sectors, benefit every consumer, and play an important role in India’s growth journey towards becoming a developed country by 2047.

“Every stakeholder in the country, every consumer, stands to benefit,” Goyal said, urging industry to pass on the benefits. He credited Prime Minister Narendra Modi for leading what he called the “biggest ever reform that India has seen since independence.”The minister added that the reforms, coming ahead of the festive season, are like a “Diwali gift” that will not only reduce taxes on daily essentials but also create a virtuous cycle of greater demand, investment, and job creation.

The Goods and Services Tax (GST) Council, chaired by Union finance minister Nirmala Sitharaman, on Wednesday announced the most extensive revamp of the indirect tax system since its rollout in 2017.The reform introduces a simplified two-slab structure of 5% and 18%, alongside a new 40% slab for luxury and sin goods.The new rates, except for tobacco where cess continues, take effect from September 22, the first day of Navratri.

Revenue secretary Arvind Shrivastava estimated the net fiscal implication of the changes at Rs 48,000 crore. He added the measures are designed to spur consumption and improve compliance.

Sitharaman underlined that the reforms were aimed at the common man, stating, “Every tax levied on common man’s daily use items have undergone a rigorous look, and in most cases, the rates have come down drastically”.

Cars

Buyers of small cars stand to benefit the most. Small cars will now attract 18% GST, reduced from the earlier 29% (28% plus 1% cess).For GST purposes, small cars are defined as petrol, LPG or CNG vehicles with an engine capacity of up to 1200 cc and length up to 4000 mm. In the case of diesel cars, the definition covers vehicles with engine capacity up to 1500 cc and length not exceeding 4000 mm.Large vehicles exceeding 1500 cc or longer than 4000 mm will fall into the new 40% GST slab.The same rate will also apply to all utility vehicles, including SUVs, MUVs, MPVs and cross-over vehicles, provided they have an engine capacity above 1500 cc, a length over 4000 mm, and a ground clearance of 170 mm or more.Unlike the earlier regime that combined 28% GST with a 17–22% cess, the new framework consolidates this into a single 40% rate without cess.

Two-wheelers have also seen a rationalisation. Motorcycles up to 350 cc engine capacity will attract 18% GST, reduced from 28%. The 18% rate also applies to 350 cc models.Motorcycles exceeding 350 cc engine capacity have been placed in the 40% bracket, aligning them with the treatment of luxury and high-powered vehicles.This change is expected to encourage mass-market two-wheeler sales, especially in rural and urban middle-class markets, while continuing to tax premium motorcycles at a higher rate.

Electric cars remain unchanged, continuing to be taxed at 5%.

A major relief comes for individuals purchasing life and health insurance. These policies will now be exempt from GST. Earlier, these services attracted 18%, adding to premium costs.Exemption is expected to make policies more affordable, widening insurance coverage in a country where penetration levels remain low.

Cigarettes and tobacco

The GST Council has shifted cigarettes, cigars, pan masala, and chewing tobacco into the 40% slab. However, until compensation cess loans are fully repaid, the existing 28% GST plus cess regime will continue.Analysts noted that revenue neutrality is a priority for the government, as cigarette taxation contributes significantly to exchequer inflows. The move balances public health concerns with the need to curb illicit trade.

Alcohol

Alcohol remains outside the purview of GST altogether. It continues to be taxed separately through state excise duties, meaning the GST overhaul has no bearing on alcohol pricing.States will retain autonomy in setting alcohol taxes, a key revenue source for their budgets.

There has been no change in the taxation of precious metals. Gold and silver jewellery remain taxed at 3%, with an additional 5% GST on making charges. Gold bars and coins also continue to face 3% GST.With no direct impact from GST 2.0, demand in the bullion market is expected to remain steady, especially during the festive season when purchases peak.

Despite repeated industry requests, mobile phones remain taxed at 18%. ET reported that the India Cellular and Electronics Association (ICEA) had sought a 5% slab, calling the current levy “regressive” and reminding that pre-GST state VAT on mobiles was mostly capped at 5%.Despite the wider rate cuts across consumer goods, mobile phones remain at 18% GST, unchanged under the new regime. As per ET, the India Cellular and Electronics Association (ICEA) had urged for a 5% slab, calling the current levy “regressive.”The industry argued that mobile phones are a basic digital necessity, not a luxury.ICEA highlighted that pre-GST, most states had capped VAT at 5%. With domestic production rising to Rs 5.45 lakh crore in FY25 and exports crossing Rs 2 lakh crore, industry bodies stressed that lower GST would have boosted affordability and domestic demand.

The government has decided to seek approval from the International Monetary Fund (IMF) to redirect the levy collected from captive power plants (CPPs) to electricity consumers.

Already, a proposal has been approved that the CPP levy will be utilised to provide relief to consumers.

The issue was taken up in a recent meeting of the Economic Coordination Committee (ECC).

During discussion, the Power Division informed the ECC that while approval of the mechanism was being sought.

Its detailed modalities pertaining to transition, calculation and additional benefits to consumers would be finalised later.

The Finance Division was of the opinion that the levy would form part of the overall budget of the Power Division for the current financial year.

While remaining within the Memorandum of Economic and Financial Policies (MEFP) framework agreed with the IMF.

However, the Power Division maintained that the relief to consumers would only be possible if considered over and above the regular budget of the division.

The ECC directed the division to seek necessary clarification from the IMF.

The Petroleum Division backed the proposal and shared its views on the mechanism, which had already been incorporated.

The Ministry of Commerce proposed that the benefit be provided only to industrial consumers.

However, it was found contradictory to the Act, which stipulates that the levy shall be utilised to pass the benefit on to all categories of consumers.

The Law Division endorsed the proposal, stating that no further legal comment was required.

The National Electric Power Regulatory Authority (Nepra) had no objection and recommended that the mechanism for providing relief to consumers be made part of the monthly fuel cost adjustment (FCA) request submitted by the Central Power Purchasing Agency-Guarantee (CPPA-G).

The Finance Division and the Ministry of Industries & Production did not come up with their views despite multiple reminders and were given the opportunity to do so during the meeting.

The Ministry of Energy (Power Division) said that Parliament had enacted the Off the Grid (Captive Power Plants) Levy Act, 2025 to impose a levy on natural gas-based CPPs in order to facilitate their transition to the electricity grid.

Section 4 of the Act provides that the concerned divisions, under the Rules of Business, 1973, shall calculate the rate of the levy by considering the difference between the electricity tariff of the industrial B-3 category notified by Nepra and the self-generation cost of CPPs at the gas tariff notified by Ogra (Oil and Gas Regulatory Authority).

In accordance with the Act, the levy shall be set initially at a fixed 5% margin over and above the power tariff, which shall increase to 10% from August 1, 2025, 15% from February 1, 2026 and 20% from August 1, 2026. It will remain at that level thereafter.

Section 2 of the Act provides the legal basis for the imposition of the levy and empowers Ogra to determine the applicable tariff.

The mechanism for calculation of the levy for CPPs has been modeled on the similar provisions notified earlier.

Furthermore, the Act authorises the federal government to notify the categories of power consumers eligible to receive the benefit of the levy.

The Ministry of Energy (Power Division) explained the mechanism for passing on the benefit to consumers.

The proposed mechanism provides that the Power Division will ensure the remittance of the collected levy to the Finance Division at the close of each month.

Based on data compiled by the Power Planning & Monitoring Company (PPMC), the amount to be passed on to electricity consumers will be calculated.

PPMC will share this information with Nepra, with a request to adjust it in consumer tariffs.

Nepra will then include the benefit in the FCA and carry out necessary due diligence.

It was noted that the benefit of the levy, collected in January, would be given to electricity consumers in the billing month of March, based on consumption in January.

In light of the above, the approval of the ECC was sought for passing on the benefit to all electricity consumers and for authorising the Power Division to implement the mechanism in consultation with Nepra under Section 31 of the Nepra Act.

Nepra will evaluate the monthly data provided by PPMC to determine the per-unit rate of the levy to be passed on to eligible consumers as per the approved mechanism and notify its determination every month along with the FCA.

The Ministry of Energy (Power Division) solicited approval of the ECC for the proposal.

The ECC considered a summary titled “Relief to Power Consumers on Account of Captives Transition Levy” and approved the mechanism.