The 56th meeting of the Goods and Services Tax (GST) Council opened in New Delhi on September 3, 2025, setting the stage for what could be the most sweeping overhaul of India’s indirect tax regime since its inception eight years ago. Chaired by Union Finance Minister Nirmala Sitharaman, the two-day session is laser-focused on “next-generation” reforms—measures that, if approved, promise to simplify compliance, rationalise rates, and perhaps most importantly, redefine the fiscal relationship between the Centre and states.
According to The Indian Express, this round of reforms is not just about tinkering with rates. Instead, it aims to address the very structure of GST, streamlining registration, refunds, and returns, while also correcting the inverted duty structure that has long plagued businesses. The GST, launched in July 2017, subsumed 17 indirect taxes and 13 cesses, but the journey since has been anything but smooth. Over a dozen rounds of rate tweaks have left the system complex, and classification disputes—think "roti versus parotta" or "salted versus caramelised popcorn"—have become the stuff of legal legend.
What’s on the table this time? The Centre’s proposal, as reported by HDFC SKY and The Indian Express, would compress the current four-slab structure (5%, 12%, 18%, and 28%) into just two principal rates: 5% (merit rate) and 18% (standard rate). A special 40% rate would be reserved for so-called "sin and demerit goods"—think tobacco, pan masala, and ultra-luxury products. This would mean 99% of goods currently taxed at 12%—such as butter, fruit juices, and dry fruits—would slide down to 5%. Meanwhile, 90% of items now taxed at 28%—including air-conditioners, refrigerators, televisions, washing machines, and cement—would drop to 18%. Only the priciest luxury cars, tobacco, and similar items would face the new 40% rate.
The Centre’s blueprint prioritises eight key sectors: textiles, fertilisers, renewable energy, automotive, handicrafts, agriculture, health, and insurance. For example, synthetic yarns and carpets would move to 5%, while high-value apparel (over Rs 2,500 per piece) would see a hike to 18%. Fertiliser inputs like sulphuric acid and ammonia could also see their rates slashed to 5%, potentially lowering farming costs. Even medical items—think diagnostic kits and bandages—are likely to benefit from reduced rates.
But the reforms don’t stop at goods. Services are also in for a shake-up. Individual health and life insurance, for instance, may be exempted from GST altogether. Hotels with tariffs below or equal to Rs 7,500 per day could see their GST rate halved to 5%. The government is also considering a distinction between small and luxury cars: small cars may move from a 28% GST plus cess to just 18%, while luxury vehicles and SUVs could be taxed at the new 40% rate.
As The Indian Express highlights, the proposal is built on three foundational pillars. The first is structural reform—resolving classification issues, correcting inverted duties, and ensuring long-term stability and predictability. The second is rate rationalisation, reducing the number of slabs and subsuming the compensation cess. The third pillar is all about ease of living: technology-driven registration, pre-filled GST returns, and automated refunds, especially for startups and small businesses. The hope is that such changes will not only reduce compliance costs but also cut down on the notorious classification disputes that have dogged the system for years.
However, the path to reform is anything but clear-cut. Political divides have surfaced, with opposition-ruled states raising red flags about potential revenue losses. Jharkhand’s Finance Minister, Radha Krishna Kishore, warned that his state alone could face a ₹2,000 crore shortfall. In a collective meeting, finance ministers from Jharkhand, Kerala, Karnataka, and West Bengal pressed for assurances that any losses would be compensated. Their argument is echoed by other states, which, according to The Indian Express, have projected annual losses ranging from Rs 85,000 crore to Rs 2 lakh crore. They argue that unless the Centre provides a safety net—such as an additional levy on sin and luxury goods, or even raising loans secured against future receipts—the reforms could destabilise state finances.
Not everyone is opposed, of course. Andhra Pradesh’s Finance Minister, Payyavula Keshav, voiced support for the reforms, stating, “As an alliance partner, we are in favor of the Centre’s suggestion of GST rate rationalisation. It is in favour of the common man.” Eight opposition-ruled states have also expressed support for the “pro-people” direction of the reforms, but insist that compensation for revenue loss must be guaranteed for at least five years, especially if revenue growth falls below 14% annually.
Revenue dynamics underpin much of the debate. As HDFC SKY reports, the 18% slab currently generates 65% of total GST revenue, while the 5% slab brings in 7%, the 28% slab 11%, and the 12% slab just 5%. The Centre’s calculations suggest that while there may be an initial dip in collections, gains from higher compliance and increased consumption could eventually offset the losses. The Department of Revenue’s internal estimates even suggest that gross GST revenues may not fall below current levels in the medium term. However, the projected overall revenue loss from the reforms is pegged at around Rs 70,000-80,000 crore, with the proposed insurance exemption alone set to cost Rs 9,900 crore annually.
Prime Minister Narendra Modi set the stage for these changes in his Independence Day speech on August 15, 2025, signalling the government’s intent to move towards a more transparent and predictable tax regime. The Finance Ministry’s proposal was subsequently submitted to a Group of Ministers and has since become the focal point of Council deliberations. The compensation cess, which was introduced to offset states’ losses during the initial years of GST, is set to end by October 31, 2025. After this date, sin and demerit goods will face the full brunt of the 40% GST rate, with the Centre planning to levy the National Calamity Contingent Duty (NCCD) on tobacco products to maintain the overall tax incidence.
Of course, the devil is in the details. The proposal also seeks to address the persistent issue of inverted duty structures—where input taxes are higher than output taxes—by aligning rates for similar goods and automating refunds. This could ease cash flow woes for businesses, particularly exporters and those in sectors like textiles and renewables. Meanwhile, the government hopes that streamlining registration and making returns pre-filled and less manual will encourage more businesses to register and comply, broadening the tax base.
The deliberations are set to continue for another day, with a final decision expected to shape the GST architecture for years to come. The stakes are high: the reforms promise a simpler, more predictable, and potentially fairer system, but only if the Centre and states can find common ground on compensation and revenue sharing. As the Council weighs its options, businesses, states, and ordinary citizens alike are watching closely—because what happens in these two days could very well redefine how India taxes, spends, and grows in the years ahead.
