When India unveiled the Goods and Services Tax in 2017, it promised “one nation, one market.” However, over time, the promise got buried under a maze of four slabs, exceptions, and compliance hurdles. That maze is now set to be cleared. Last week, the GST Council in the 56th council meeting made its most daring move since the initial launch: endorsing what is now referred to as the “Next-Gen GST”, a reform that streamlines the framework into three brackets: 5% for essential goods, 18% as the standard rate, and 40% for luxury and demerit items1. These resolutions, revealed in early September, have already laid the groundwork for transformation. Price lists are being restructured, ERP systems are being adjusted, and sectors are being recalibrated. The actual implementation, however, is set to commence on September 22, 2025, strategically aligned with the festive season. Once put into action, the reform is anticipated to accomplish more than just modifying tax rates. It is expected to boost demand, clear export channels, simplify imports, and enhance India's appeal to global investors as a market with a clear and growth-oriented tax environment. For businesses, this transition will offer both relief and accountability: an opportunity to gain from simplification, but only if the upcoming weeks are utilised effectively for preparation.
From Complexity to Clarity
These decisions have swiftly clarified the landscape for various industries. Automakers, electronics manufacturers, and FMCG companies have started to adjust their pricing strategies. Healthcare and pharmaceutical organisations have welcomed for exemptions and reductions that decrease patient expenses and boost export competitiveness. The government's objective is unmistakable: to stimulate demand in anticipation of the festival season. By lowering taxes on essential goods, it has already indicated that household finances will have more flexibility. Economists anticipate that, once enacted, the reform could reduce inflation by as much as 1.1 percentage points and create opportunities for businesses to engage in new consumption cycles. For investors and multinational companies observing India's policy landscape, the Council's decision serves as a significant benchmark. It reflects a commitment to pursue simplification, even at the risk of short-term revenue losses. However, the true challenge will arise when businesses begin invoicing under the new system and consumers respond to the adjusted prices.
Simplified Tax Slabs Promises Market Growth
At the core of GST 2.0 lies a streamlined slab system, condensing the previous four-tier structure (5%, 12%, 18%, and 28%) down to mainly two: 5% for essential items and 18% as the standard rate. A newly instituted 40% demerit rate applies to luxury and sin goods, including pan masala, gutkha, cigarettes, high-end motorcycles (over 350cc), yachts, and private jets. This transition removes the 12% and 28% slabs for the majority of items, thereby reducing classification disputes and easing compliance complexities. Rate reductions encompass various sectors2:
- Consumer Goods:Products such as soaps, shampoos, toothpaste, packaged snacks, chocolates, and coffee see a decrease from 12% or 18% to 5%. Home appliances like TVs (above 32 inches), air conditioners, and dishwashers drop from 28% to 18%.
- Agriculture and Rural Economy:Equipment like tractors, harvesters, irrigation tools, and bio-pesticides are reduced from 12% to 5%, leading to a decrease in farming costs by up to 7%.
- Automotive:Small cars, two-wheelers (up to 350cc), buses, and auto parts transition from 28% to 18%, which may lower vehicle prices by 10%.
- Textiles and Handicrafts:Manmade fibres and yarns fall from 18% or 12% to 5%, correcting inverted duties and bolstering MSMEs.
- Healthcare:Essential drugs and diagnostic kits become exempt from GST (down from 12%), while other medications are reduced to 5%. Individual health and life insurance premiums are completely exempt.
- Services:Hotel accommodations, gyms, salons, and yoga services see a reduction from 12% or 18% to 5%. Beauty services are also lowered to 5% without input tax credit (ITC).
The steepest rate, designated for luxury cars, tobacco, carbonated beverages, and high-end products, replaces the previous 28 percent plus cess. This not only simplifies compliance but also fortifies the government's “sin tax” approach. Overall, these revisions are anticipated to decrease prices on essential goods, stimulating demand and aiding economic growth amidst inflationary pressures.
Impact on Exports: Faster Refunds and Enhanced Competitiveness
Exports, a fundamental pillar of India's economy valued at $86.5 billion to the U.S. alone in 2024-25, stand to benefit greatly from GST 2.0. Important changes target longstanding challenges, facilitating quicker capital turnover and reducing costs3.
A significant advantage is the elimination of the refund threshold under Section 54(14) of the CGST Act for exports with tax payment, which aids small exporters using courier or postal services4. Previously, refunds were not granted for shipments below certain values; now, even small consignments are eligible, supporting sectors such as handicrafts and gems.
The omission of Clause (b) in Section 13(8) of the IGST Act relocates the place of supply for intermediary services to the recipient's location. This allows Indian service providers to obtain export status, unlocking benefits of zero-rating and ITC refunds. For IT, consulting, and back-office firms catering to global clients, this could lower effective tax costs by 18%, improving price competitiveness.
Moreover, a risk-based provisional refund system allows 90% of claims for zero-rated supplies and inverted duty structures to be processed rapidly, beginning November 1, 2025. This approach mirrors systems in place for export-oriented units (EOUs) and addresses delays that previously constrained working capital.
Rate adjustments in the textiles, agriculture, and automotive sectors resolve inverted duties where input taxes exceed output taxes resulting in accumulated credits. Quicker refunds could release billions in liquidity, assisting exporters in navigating external shocks such as U.S. tariffs5. Analysts anticipate a 5-7% increase in export margins for MSMEs, particularly in labour-intensive sectors.
Impact on Imports: Cost Reductions and Strategic Exemptions
India's import market from the U.S., valued at $45.3 billion for 2024-25, benefits significantly from the targeted initiatives under GST 2.0, achieving a balance between cost savings and strategic objectives. The reforms slash IGST on crucial imports, such as natural cut and polished diamonds (up to 25 cents) under the Diamond Imprest Authorisation Scheme, along with technical documentation, works of art, antiques, and high-value defence equipment, including flight simulators, submarines, and missiles. Previously subjected to taxes of up to 18%, these exemptions could lead to substantial savings for importers, bolstering sectors like gems and jewellery, which is a major contributor to exports.
Moreover, the removal of IGST on high-performance batteries, sonobuoys, and solar devices reduces procurement expenses for renewable energy and defence, supporting India's objectives for self-reliance in essential technologies. These financial benefits foster increased domestic value addition, allowing manufacturers to incorporate imported components into export-focused production more affordably.
Nonetheless, not all imports are granted relief. The GST rate on coal is set to rise from 5% to 18%, which could escalate energy import costs and encourage businesses to source domestically. This move aligns with India's commitment to energy security but necessitates careful adjustments within the supply chain6. In summary, these reforms fine-tune import duties, diminish dependence on non-essential goods, and promote a more streamlined trade deficit while nurturing strategic industries.
Cross-Border Business and Global Investor Sentiment
GST 2.0 stimulates domestic growth by lowering input costs such as reducing cement taxes from 28% to 18% and decreasing auto parts rates, thereby benefiting the construction and manufacturing industries. Streamlined registration for low-risk entities (with output tax ≤ ₹2.5 lakh/month) enables approval within just three days, encompassing 96% of applicants and facilitating entry for start-ups and MSMEs.
On the international front, the reforms promote smooth global transactions by standardising tax treatments and lessening compliance challenges for multinational corporations involved in cross-border supply chain operations. For example, e-commerce suppliers can now opt for pan-India registration, simplifying logistics across multiple states and borders, which is especially beneficial for global platforms expanding within India.
Globally, the establishment of the Goods and Services Tax Appellate Tribunal (GSTAT) by the end of September 2025, with hearings set to begin in December, promises expedited dispute resolution, fostering confidence among foreign investors in sectors such as renewables and textiles. This reliability, combined with rate adjustments, enhances India's appeal as an investment hub, potentially elevating investor sentiment amidst global uncertainties. The hospitality and healthcare sectors also benefit, as reduced rates on accommodations and insurance exemptions are expected to increase foreign tourist arrivals and medical tourism, further integrating India into global value chains.
Offsetting Upcoming Challenges
To fully leverage GST 2.0, businesses must navigate the transition with accuracy and foresight:
- Update Pricing and Inventory Systems: By September 22, it is essential to ensure that pricing and inventory systems are aligned with the new rates and ITC regulations to facilitate uninterrupted operations. Supply chain disruptions during this transition can be alleviated by performing phased audits and utilising ERP software updates. Exporters and importers should conduct scenario analyses to optimise workflows and prevent bottlenecks.
- Monitor Tobacco-Related Notifications: Outstanding notifications regarding tobacco products could affect supply chains, leading to risks of stockpiling or shortages. By proactively diversifying suppliers and keeping an eye on GST portal alerts, businesses can ensure continuity. Corporations within impacted sectors can collaborate with industry associations to stay informed about regulatory changes and advocate for clarity.
- Leverage Digital Tools for Faster Refunds:Digital platforms enhance refund processes, though intricate claims may encounter delays, especially for high-risk cases, which could impact cash flow for exporters. Investing in compliance software and providing internal training can expedite processing. Importers facing increased costs on items such as coal should consider alternative sourcing or hedging strategies to maintain cost efficiency.
- Opt into Simplified Schemes Voluntarily: Simplified schemes provide flexibility, but businesses must ensure they align with their operational models, particularly for cross-border activities. Multinational corporations ought to examine transfer pricing implications to guarantee seamless integration with global operations.
- Fiscal Oversight on Revenue Shortfalls: The projected ₹10,664 crore shortfall from IGST exemptions necessitates vigilant monitoring, as compensatory measures may impact businesses7. Exporters and importers should take advantage of refunds and exemptions, refining operations to build resilience against potential fiscal adjustments.
Looking Ahead at the Golden Lining
Although GST is a domestic tax, its international effects are profound. Importers overseas will soon notice that Indian suppliers can set more competitive prices, thanks to the alignment of input credits. Sectors focused on exports, such as textiles, pharmaceuticals, and renewable energy, are already gearing up marketing strategies to showcase the advantages post-implementation.
While the complete effects will unfold only after September 22, industries and investors have already started adjusting their strategies in anticipation of its influence. Automobile manufacturers like Kia, Tata, JSW MG, and Audi India have already revealed upcoming price reductions. FMCG companies are advocating for more flexible labelling regulations to prevent the wastage of outdated packaging.
For international investors, this reform indicates that India is progressing towards global best practices, where typically two or three broad tax rates prevail. India is advancing towards a global model of streamlined indirect taxation. Companies that have adequately prepared will be in the strongest position to thrive within this new tax environment.
Footnotes
1. Modi, N., Sitharaman, N., & GST Council. (2025). GST Reforms 2025: Relief for Common man, Boost for businesses [Report].
2. Council, G., & Sitharaman, N. (2025). 56th Meeting of the GST Council [Press-release].
3. Pti. (2025, September 8). Nirmala Sitharaman says government working on comprehensive package to support exporters hit by U.S. tariffs. The Hindu.
4. Council, G., & Sitharaman, N. (2025b). 56th Meeting of the GST Council [Press-release].
5. Singh, T. D. (2025, September 4). GST reforms vs US tariffs: What it means for India's GDP, inflation, fiscal deficit | Hindustan Times. Hindustan Times.
6. Modi, N., Sitharaman, N., & GST Council. (2025b). GST Reforms 2025: Relief for Common man, Boost for businesses [Report].
7. TOI Business Desk. (2025b, September 5). GST reforms: Government may lose Rs 10,664-crore in IGST receipts; GTRI flags import-linked shortfall. The Times of India.
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