Prime Minister Modi unveils next-generation GST reforms

While delivering his address during India’s Independence Day in August, Prime Minister Narendra Modi announced that the government of India would bring Next-Generation reforms of the Goods and Services Tax(GST), which will bring down the tax burden on the common man.

Keeping on that promise, the GST Council approved Next-Gen GST reforms on September 3, bringing in a significantly simplified system with lower tax rates. This lowering of taxes will directly benefit the common man, farmers, MSMEs, women, youth, and middle-class families, while strengthening India’s long-term growth.

Introduced for the first time on July1, 2017, GST is India’s most significant indirect tax reform since Independence. The GST brings multiple central and state taxes into a single, unified system.

This comprehensive reform package, dubbed GST 2.0, will now have a simplified two-slab structure of 5%and 18%. This simplification is coupled with sweeping rate reductions across sectors, with a focus on sectors that affect the common man.

The reforms will be effective from September 22.The tax reductions are aimed at benefiting the labour-intensive industries, farmers as well as the agriculture and the health sectors.

To boost affordability for the middle class, taxes have been cut on house-hold essentials like soaps, toothpaste, bread, etc which will range from Nilto 5%. Two-wheelers and small cars would become more affordable with tax cut down from 28% to 18%. Cheaper machinery and lower rates on bio-pesticides will help small farmers reduce costs and encourage sustainable farming practices.

Lower GST rates on handicrafts will support artisan livelihoods and pro-mote rural economic growth. Reduced rates on medicines and medical devices will improve access to healthcare and support domestic manufacturing in the pharma and medical equipment sectors.

Tax has been brought to Nil from previous tax of 12% on 33 life-saving drugs and diagnostic kits.

The only exceptions will be specified goods namely, cigarettes, chewing tobacco products, unmanufactured tobacco, etc. for which the existing rates of GST and compensation cess will continue to apply and the new rates will be implemented at a later date. A higher rate of 40% will target luxury items like high-end cars, tobacco products, pan masala, and sugary drinks.

Further, through GST 2.0 reforms, the healthcare and insurance sectors gain significantly from complete exemption of individual health and life insurance from GST. This policy change is expected to increase insurance penetration across India, addressing the gaps in financial protection for families.

Easy registration for small and low-risk businesses will benefit also from the ease in filing aided by digitalisation of processes. Digital filing ensures not just ease but also faster refunds.

Digital enhancements, such as AI-driven audit systems and real-time tracking, will minimise human intervention and curb evasion. By boosting consumption, the GST reforms will act as an economic catalyst and are expected to encourage self-reliance and lesser susceptibility to global tariffs. These will empower MSMEs and manufacturers and boost demand driving consumption and manufacturing growth across India.

The adoption of a simplified GST structure and wide-ranging rate reductions marks a new chapter in India’s tax journey. The reforms come soon after the announcement of Q1 2025 GDP growth rate of the Indian economy at 7.8%. The GST reforms will bring affordability for citizens and encourage competitiveness for businesses.

This simpler, fairer, and growth-oriented GST framework will further India’s inclusive prosperity and economic transformation while reinforcing the nation’s pursuit of self-reliance.

* Jaspreet is the Consul General of India in Cape Town.