Centre’s Two-Rate GST Proposal Gets GoM Nod: What It Means for You

A Fresh Start for

Imagine the tax system simplified; like trimming a multi-layered cake down to just two layers. That’s what the Indian government is aiming for with its bold proposal: replace the current four-tier Goods and Services Tax (GST) structure (5%, 12%, 18%, 28%) with a simpler two-tier system of 5% and 18%, along with a special 40% levy on luxury or “sin” goods like high-end cars, tobacco, and other indulgent items. 

On August 21–22, 2025, the Group of Ministers (GoM), which includes finance ministers from key states, gave their unanimous approval to this proposal, sending strong signals that the plan is gaining momentum. 

Why Does It Matter for You?

• Consumers: Many everyday items, especially essentials, could move to the 5% slab, lowering prices you pay.

• Small businesses & MSMEs: A simpler tax system means fewer hassles in compliance and filing, making life just a bit easier.

• Farmers and middle-class families: With fewer bands and clearer categories, it could become easier to see how much tax is paid and why.

Potentially, goods previously taxed at 12% will be mostly shifted to 5%; and around 90% of items in the 28% slab would now fall under the 18% rate, so big chunks of your regular purchases might just get cheaper. 

The 40% For Sin and Luxury Goods

What about that 40% tax? The government wants to maintain the current level of taxation on things seen as unnecessary or harmful, like tobacco, ultra-luxury cars, or sugary drinks, but under a clearer structure. Instead of confusing cess layers, a flat 40% is proposed for such items. 

But Where’s the Money Going to Come From?

There’s a flip side. Critics, especially from opposition-ruled states, worry about revenue losses. Economic estimates suggest the overhaul could cost the exchequer anywhere from ₹60,000 crore to ₹85,000 crore annually unless growth from lower prices picks up fast. 

States are insisting the Centre either ensures compensation or finds other ways, like extending the compensation cess or adding extra duties to make sure their budgets don’t suffer.

What’s Next?

• The GST Council where both the Centre and all states meet, will discuss this in depth, probably during the third week of September.

• If all goes well, the simplified rates could be implemented by October, just in time for Diwali shopping season.
  

A Step Toward GST 2.0 and Beyond

Many experts are hailing this as a major push toward “GST 2.0”, a cleaner, more transparent, growth-friendly regime. Some even say it could lay the groundwork for a single-rate GST by 2047, aligning with India’s vision for a simpler tax ecosystem. 

What You Should Keep in Mind

1. Lower taxes on many essentials: If you buy packaged foods, clothing, household items, or services previously taxed at 12%, expect a welcome drop in prices.

2. Good news for small businesses: Less complexity means fewer trips to the accountant or less stress on your tax software.

3. States are watching: There's a tug-of-war between easing your burden and keeping state finances healthy. Watch if there's talk of compensation or sunset of cess.

4. Timing matters: If this hits by Diwali, expect bargains. But markets, logistics, and tax administration need to be ready.
   

In Summary

The government's two-rate GST reform, endorsed by the GoM, offers a fresh promise, simpler tax slabs, cheaper essentials, and a fair tax on luxury items. But balancing consumer relief with state finances is delicate. The GST Council’s September session is where the rubber meets the road and the upcoming festive season could well depend on what happens next.