Purchasing power & pricesIndia

In forceFully in force: bidi at 18%, pan masala, other tobacco products, cigarettes and nicotine inhalation products at 40%, valued on the retail sale price; compensation cess set at nil on these goods.

GST rate rationalisation (« GST 2.0 »), 2025

On 3 September 2025 India’s GST Council, which brings together the Union and the States, replaced the four main rates of the goods and services tax (5, 12, 18 and 28%) with a standard rate of 18% and a merit rate of 5%, plus a special 40% rate for a few « sin » and luxury goods, into which the compensation cess is merged. The new rates apply since 22 September 2025; tobacco products and pan masala followed on 1 February 2026, when the compensation cess on them was withdrawn. The government puts the net revenue cost at about ₹47,700 crore; States such as Kerala fear a larger loss for themselves.

Updated: November 5, 2026

At a glance

Reference text

Recommendations of the 56th Meeting of the GST Council (New Delhi, 3 September 2025), given effect by Notification No. 9/2025–Central Tax (Rate) of 17 September 2025[1][6]

No. 56th GST Council meeting; Notification No. 9/2025–Central Tax (Rate) · September 3, 2025

Read the text ↗

Carried by

  • Narendra Modi[1]Prime Minister — announced the « next-generation GST reforms » from the Red Fort on 15 August 2025 · 2025 · Initiator
  • Nirmala Sitharaman[1][3]Union Minister of Finance and Corporate Affairs, chairperson of the GST Council — chaired the 56th meeting; empowered to set the transition date for tobacco products · 2025-2026 · Implementation

Implementation

Status

In force

since February 1, 2026[6]

Fully in force: bidi at 18%, pan masala, other tobacco products, cigarettes and nicotine inhalation products at 40%, valued on the retail sale price; compensation cess set at nil on these goods.

Stated objective

Replace the four-tier structure with a « citizen-friendly “Simple Tax” » of two main rates, with a focus on the common man, labour-intensive industries, farmers and agriculture, health and key drivers of the economy; keep similar goods at the same rate to avoid misclassification and disputes; merge the compensation cess into the 40% rate « so as to maintain tax incidence »; lower the cost of living, support consumption and formalisation, and correct inverted duty structures.[1][2][23]

According to the GST Council (56th meeting and its FAQs) and the Ministry of Finance (Economic Survey 2025-26)

Main measures

  • Two main rates: a standard rate of 18% and a merit rate of 5%, replacing the former 5, 12, 18 and 28% rates; a special « de-merit » rate of 40% for a select few goods and services.[1][21]
  • Everyday goods to 5% or nil: hair oil, toilet soap bars, shampoos, toothpaste, bicycles, kitchenware moved from 18% or 12% to 5%; almost all packaged foods (namkeens, sauces, pasta, chocolates, coffee, butter, ghee) to 5%; UHT milk, pre-packaged paneer and all Indian breads exempted.[1]
  • Health and insurance: all individual life and health insurance policies exempted; 33 lifesaving drugs from 12% to nil and 3 from 5% to nil; all other medicines from 12% to 5%; medical devices to 5%.[1][2]
  • Durables, vehicles and construction: air conditioners, TVs, dishwashers, small cars, motorcycles up to 350 cc, three-wheelers, buses, trucks, ambulances and cement from 28% to 18%; uniform 18% on auto parts; tractors and farm machinery from 12% to 5%.[1][2]
  • Services: hotel rooms up to ₹7,500 a night from 12% to 5%; gyms, salons, barbers and yoga centres from 18% to 5%.[1]
  • End of the compensation cess merged into GST: mid-size and large cars (28% GST plus a 17-22% cess before) go to 40% without cess, and motorcycles above 350 cc to 40%; coal’s cess of ₹400 a tonne is merged into its GST rate, which the Council says adds no burden.[2]
  • Inverted duty structures corrected: man-made fibre from 18% to 5% and yarn from 12% to 5%; sulphuric acid, nitric acid and ammonia from 18% to 5%; 90% provisional refunds of inverted-duty credit granted administratively from 1 October 2025.[1][18]
  • Tobacco in two steps: pan masala, cigarettes and other tobacco products kept their old GST and compensation cess until 31 January 2026; since 1 February 2026 they are taxed at 40% (bidi at 18%) on the declared retail sale price, without compensation cess, and pan masala manufacturing is subject to the new Health Security se National Security Cess.[1][6][15][16]

In data

GST rate on selected goods and services, before and after 22 September 2025[1][2][23]

Rates before and after the 56th GST Council meeting

GST rate on selected goods and services, before and after 22 September 2025 — chart values
Good or serviceBeforeFrom 22 Sept. 2025
Small cars, motorcycles ≤ 350 cc28%18%
Cement28%18%
Air conditioners, TVs, dishwashers28%18%
Medicines (other than exempted ones)12%5%
Tractors and farm machinery12%5%
Hotel rooms ≤ ₹7,500 a night12%5%
Gyms, salons, barbers, yoga centres18%5%
Man-made fibre18%5%
UHT milk5%0%

Scale starts at 0% · Combined GST rate (central + State). Goods that also bore the compensation cess are not shown, since the cess is not included here.

Inflation (CPI)

5%

2024

Annual series: the Economic Survey reports monthly CPI inflation of 0.3% in October 2025 and attributes the disinflation mainly to food prices.

World BankSee the card →

Key figures

Special (« de-merit ») GST rate

40%

since 22 September 2025 · Observed

GST Council[1][2][13][6]

Includes the former compensation cess; it is the ceiling allowed by the CGST Act (20% central rate, doubled by the matching State GST).

Lifesaving drugs moved from 12% to nil

33

from 22 September 2025 · Observed

GST Council[1]

Plus 3 drugs moved from 5% to nil; all other medicines from 12% to 5%.

Consumer price inflation

0.3%

October 2025, year over year · Observed

Ministry of Finance, Economic Survey 2025-26 (MoSPI data)[24]

Lowest reading of the CPI (2012=100) series; 1.4% in September 2025. The Survey attributes it mainly to food prices.

Gross GST collections, change over one year

0.7%

November 2025 · Observed

Ministry of Finance, answer in the Lok Sabha[18][5]

₹1,70,276 crore against ₹1,69,016 crore in November 2024.

GST collections, change over one year

8.7%

April 2026 · Observed

GST Council Secretariat[10][6][7][8][9]

A record ₹2.42 lakh crore; +6.1% in December 2025, +6.2% in January 2026, +8.1% in February and +8.8% in March 2026.

Timeline

  1. Constitution (101st Amendment) Act: legal basis of the GST and of the GST Council[12][11]

    New article 279A creates the GST Council; section 18 provides for compensation to the States for revenue losses from the GST for five years.

  2. CGST Act and GST (Compensation to States) Act enacted[13][14][22][6]

    The CGST Act caps the central GST rate at 20% (40% with the matching State GST); the Compensation Act creates the compensation cess. Compensation to the States was paid for five years, up to June 2022.

  3. 45th GST Council meeting: a Group of Ministers on rate rationalisation is set up[21]

    Its report, and that of a Group of Ministers on life and health insurance set up in September 2024, were presented to the 56th meeting.

  4. Announced

    The Prime Minister announces « next-generation GST reforms »[1]

  5. Adopted

    The 56th GST Council meeting approves the rate rationalisation[1][6]

    Recommendation of the Council, given legal effect by rate notifications of 17 September 2025.

  6. Rate notifications published[6]

    Notification No. 9/2025–Central Tax (Rate) sets the new central GST schedules, including the 9% (18% in total) and 20% (40% in total) schedules.

  7. In force

    New rates apply to services and to all goods except tobacco products[1][2]

    Pan masala, gutkha, cigarettes, chewing tobacco, unmanufactured tobacco and bidi keep their former GST and compensation cess until the cess account’s loans and interest are repaid.

  8. Launch of the GST Appellate Tribunal (GSTAT)[4][1]

    Part of the trade-facilitation measures recommended by the 56th meeting alongside the rate changes.

  9. Consumer price inflation falls to 0.3%, the lowest of the CPI (2012=100) series[24]

    The Economic Survey attributes the disinflation mainly to food prices and expects the continued pass-through of the GST rate cuts to temper cost pressures.

  10. Health Security se National Security Cess Act, 2025[15][16][6]

    A new central cess levied on the machines or processes used to manufacture pan masala; its rules apply from 1 February 2026, the date pan masala leaves the compensation cess.

  11. Lok Sabha: the government puts the net revenue cost at about ₹47,700 crore[17]

    About ₹93,300 crore of net negative impact from the rate cuts, partly offset by about ₹45,570 crore from items moved from 28% to 40% (2023-24 consumption data); figures « should not be viewed as definitive ».

  12. Notifications for the tobacco transition[6]

    Notification No. 19/2025–Central Tax (Rate) moves tobacco products and pan masala to the new schedules, and No. 03/2025–Compensation Cess (Rate) sets their compensation cess at nil, both from 1 February 2026.

  13. Economic Survey 2025-26: GST collections expected to « remain resilient »[23]

  14. In force

    Tobacco products and pan masala move to the new rates; their compensation cess is withdrawn[6]

    Fully in force: bidi at 18%, pan masala, other tobacco products, cigarettes and nicotine inhalation products at 40%, valued on the retail sale price; compensation cess set at nil on these goods.

  15. GST collections reach a record ₹2.42 lakh crore[10]

    +8.7% year over year in April 2026, according to the GST Council Secretariat.

  16. 57th GST Council meeting turns to process reforms[3]

    After the 56th meeting’s rate rationalisation, the Council recommends procedural changes (registration, returns, refunds, adjudication), including the withdrawal of arrest powers under GST; several require amendments to the CGST Act and Rules.

The debate

Citoyen takes no position: arguments are reported as their authors put them.

According to its supporters

  • The Ministry of Finance argues that the lower tax burden on essentials should lower the cost of living and stimulate consumption, and that a simpler two-rate structure cuts transaction costs, eases compliance and draws small businesses into the formal sector; it cites e-way bills, PMI, festive car sales, UPI payments and tractor sales as signs of stronger momentum after the reform.[18][23]
  • The Economic Survey 2025-26 expects higher consumption volumes and better compliance to offset the effect of the rate cuts on revenue, so that GST collections « remain resilient », and credits the reform with correcting inverted duty structures in textiles and fertilisers.[23]
  • The government states that price monitoring by the CBIC of packaged foods and medicines before and after 22 September 2025 shows the benefits « have duly been passed on » to consumers, backed by an order to revise drug MRPs and consumer complaint channels.[19][20]

According to its opponents

  • At the 56th meeting, Kerala’s Finance Minister warned that, because most items consumed in Kerala bear the higher rates, the State’s loss would be relatively larger: about ₹2,500 crore a year from automobiles, insurance, cement and electronics alone, and more than ₹8,000 crore a year in total, by the State’s own estimate.[17]
  • Lok Sabha members V. K. Sreekandan and S. Venkatesan asked whether a new Group of Ministers would address the States’ initial revenue losses; the government answered that no such proposal is under consideration, while estimating the net cost at about ₹47,700 crore. Compensation for GST losses, provided by the Constitution for five years, ended in June 2022.[17][22]

Indicators to watch

  • Inflation (CPI) · FMI / MoSPISee the card →
  • General government budget balance · FMISee the card →
  • Gross GST collections (monthly) · GST Council / GSTNno Citoyen card yet
  • States’ GST revenue · Ministry of Financeno Citoyen card yet

Sources

  1. [1]Recommendations of the 56th Meeting of the GST Council held at New Delhi (PIB release, Ministry of Finance, 3 September 2025) — GST Council Secretariat / Press Information Bureau, September 3, 2025
  2. [2]Frequently Asked Questions (FAQs) on the decisions of the 56th GST Council held in New Delhi (PIB release, 3 September 2025) — GST Council Secretariat / Press Information Bureau, September 3, 2025
  3. [3]Recommendations of the 57th Meeting of the GST Council (PIB release, Ministry of Finance, 8 October 2026) — GST Council Secretariat / Press Information Bureau, October 8, 2026
  4. [4]GST Newsletter, Issue 78 — September 2025 — GST Council Secretariat, October 2025
  5. [5]GST Newsletter, Issue 80 — November 2025 — GST Council Secretariat, December 2025
  6. [6]GST Newsletter, Issue 81 — December 2025 (Notifications No. 19/2025–Central Tax (Rate) and No. 03/2025–Compensation Cess (Rate) of 31.12.2025) — GST Council Secretariat, January 2026
  7. [7]GST Newsletter, Issue 82 — January 2026 — GST Council Secretariat, February 2026
  8. [8]GST Newsletter, Issue 83 — February 2026 — GST Council Secretariat, March 2026
  9. [9]GST Newsletter, Issue 84 — March 2026 — GST Council Secretariat, April 2026
  10. [10]GST Newsletter, Issue 85 — April 2026 — GST Council Secretariat, May 2026
  11. [11]About the GST Council — GST Council Secretariat
  12. [12]The Constitution (One Hundred and First Amendment) Act, 2016 — Gazette of India, 8 September 2016 — Ministry of Law and Justice (copy hosted by the GST Council), September 8, 2016
  13. [13]The Central Goods and Services Tax Act, 2017 (No. 12 of 2017) — Gazette of India, 12 April 2017 — Ministry of Law and Justice (copy hosted by the GST Council), April 12, 2017
  14. [14]The Goods and Services Tax (Compensation to States) Act, 2017 (No. 15 of 2017) — Gazette of India, 12 April 2017 — Ministry of Law and Justice (copy hosted by the GST Council), April 12, 2017
  15. [15]The Health Security se National Security Cess Act, 2025 (No. 35 of 2025) — Gazette of India, 16 December 2025 — Ministry of Law and Justice (copy hosted by CBIC), December 16, 2025
  16. [16]Notification No. 01/2026–HSNS Cess (G.S.R. 02(E)), 1 January 2026 — Health Security se National Security Cess Rules, 2026 — Ministry of Finance, Department of Revenue (copy hosted by CBIC), January 1, 2026
  17. [17]Lok Sabha Starred Question No. *216 — Revenue losses to States due to GST rationalisation (answered 15 December 2025) — Lok Sabha / Ministry of Finance, Department of Revenue, December 15, 2025
  18. [18]Lok Sabha Unstarred Question No. 2327 — GST 2.0 structure and economic impact (answered 15 December 2025) — Lok Sabha / Ministry of Finance, Department of Revenue, December 15, 2025
  19. [19]Lok Sabha Unstarred Question No. 157 — GST reduction benefits to consumers (answered 1 December 2025) — Lok Sabha / Ministry of Finance, Department of Revenue, December 1, 2025
  20. [20]Lok Sabha Unstarred Question No. 1360 — Monitoring of GST reduction benefits by CBIC (answered 8 December 2025) — Lok Sabha / Ministry of Finance, Department of Revenue, December 8, 2025
  21. [21]Lok Sabha Unstarred Question No. 1374 — Impact of GST reduction (answered 8 December 2025) — Lok Sabha / Ministry of Finance, Department of Revenue, December 8, 2025
  22. [22]Lok Sabha Unstarred Question No. 59 — Discontinuation of GST compensation (answered 1 December 2025) — Lok Sabha / Ministry of Finance, Department of Revenue, December 1, 2025
  23. [23]Economic Survey 2025-26, Chapter 2 — Fiscal Developments: Anchoring Stability through Credible Consolidation (incl. Box II.2, « Expected channels of impact of GST 2.0 reforms ») — Ministry of Finance, Department of Economic Affairs, January 2026
  24. [24]Economic Survey 2025-26, Chapter 5 — Inflation: Tamed and Anchored — Ministry of Finance, Department of Economic Affairs, January 2026