GST 2.0 explained: From healthcare to automobiles, how two-tier GST reform will reshape consumption

The GST Council had announced a major simplification by moving to a two-tier tax structure of 5 per cent and 18 per cent, effective from September 22, 2025, with a few selected items attracting a higher rate of 40 per cent. Under this reform, investment advisory firm HDFC Tru noted in its report that the GST rates have been reduced across nearly 90 per cent of product categories, making the system more streamlined.

Industry experts believe this could lift GDP growth by 20–30 basis points in FY26 (not annualised), helping to offset external pressures such as the impact of US tariffs. Overall, GST 2.0 encourages demand-led growth.

Sector-wise GST rates

Healthcare

The healthcare sector has received significant relief under GST 2.0. Individual health and life insurance policies, earlier taxed at 18 per cent, are now fully exempt. These changes will help reduce healthcare expenses and encourage people to opt for insurance coverage, making healthcare aids more affordable. Industry experts also cite this as a transformative measure towards greater affordability and inclusivity. 

GST has been reduced from 12 to 5 per cent on key medical products, including thermometers. 

Consumer staples

Under GST 2.0, several commonly used personal care and food items have become cheaper. Products like hair oil, shampoo, toilet soap, toothpaste, toothbrush and shaving cream which earlier attracted 18 per cent GST, will now fall under the 5 per cent slab. Similarly, butter, ghee, cheese and dairy spreads have shifted from 12 per cent to 5 per cent. This change directly benefits households, boosting consumption of FMCG goods.

Education

In education, essential learning materials have been made completely tax-free. Items such as maps, charts, globes, exercise books and notebooks, which earlier attracted 12 per cent GST, will now fall under the zero-GST slab. Meanwhile, the rates on geometry boxes, school cartons and trays have been reduced to 5 per cent from 12 per cent.

Automobiles

GST 2.0 has brought major changes to the automobile sector. Small petrol and petrol-hybrid cars, including LPG and CNG variants (with engines ≤1200cc and length ≤4000mm), along with motorcycles up to 350cc, will now attract 18 per cent GST, reduced from the earlier 28 per cent. This restructuring is aimed at making entry-level vehicles more affordable for the middle class, stimulating demand in the auto sector, while keeping luxury vehicles in a higher slab.

Tractors, tyres and parts have been moved to 5 per cent GST slab.

Agriculture

The agriculture sector has also been provided relief with lower GST rates on crucial equipment. Tractors and drip irrigation systems, including sprinklers, which previously carried 12 per cent GST, will now be taxed at 5 per cent. This reduction will lower costs for farmers and encourage sustainable agricultural practices.

Electronic Appliances

Air conditioners and televisions (above 32 inches, including LED and LCD models), which earlier faced 28 per cent GST, will now be taxed at 18 per cent. This rate cut is expected to boost demand in the consumer durables sector just ahead of the festive season.

Services such as gyms, hotels

Under the service sector, hotel rooms with tariffs up to ₹7,500 per day will attract a lower GST rate of 5 per cent (from 12 per cent earlier). Services such as gyms, salons, barbers and yoga are taxed under the 5 per cent slab from 18 per cent earlier.

GST 2.0: Merits

The simplified tax regime is expected to boost economic activity. Households benefit directly, as daily essentials, food products and healthcare services become cheaper or tax-free, easing the cost of living. Key sectors such as automobiles, electronics and agriculture benefit from lower GST rates, which can stimulate demand and support manufacturing growth.

Market experts believe that the reduced GST rates could help lower retail inflation. According to SBI Research, the rationalisation of GST on services will likely trim CPI inflation by another 40-45 bps.

GST 2.0: Key challenges

While the government estimates a net annualised fiscal impact of about ₹48,000 crore (0.13 per cent of GDP) due to these rate cuts, the move is expected to give a strong boost to consumption in sectors such as automobiles, consumer discretionary goods and staples.

State finances will remain under pressure with increased dependence on consumption boost. The steep 40 per cent tax on sin and luxury goods such as tobacco and high-end vehicles may hit demand. Businesses, especially smaller ones, will face transitional challenges in ensuring compliance with the new slabs, potentially leading to short-term confusion and disputes. Overall, while households benefit, GST 2.0 risks uneven sectoral impacts, fiscal stress and compliance hurdles.

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Published on September 5, 2025