The shift to the new GST 2.0 structure primarily simplifies the tax regime from four main slabs (5%, 12%, 18%, 28%) to two key slabs: 5% (Merit Rate) and 18% (Standard Rate), plus a special high rate. The goal is to reduce the tax burden on everyday essentials, simplify compliance for businesses, and boost consumer spending.
Simplified Tax Slabs
1. Removal of Mid-Slabs:
- The 12% and 28% tax slabs have been largely removed, with most goods and services migrating to either the 5% or 18% slab.
2. The Two Core Rates:
5% (Merit Rate):
This low rate applies to essential goods and services that form part of common consumption for the general public (e.g., daily essentials, basic healthcare).18% (Standard Rate):
This is the main rate applicable to most manufactured goods and consumer services (e.g., electronic appliances, standard services).
3. The Special Demerit Rate (40%):
- A much higher rate of 40% is applied only to luxury and sin goods (like tobacco products, pan masala, and high-end luxury vehicles) to maintain revenue and discourage consumption.
4. Nil/0% Rate:
- Several items, including specific food staples (like Indian breads and UHT milk) and critical healthcare items, are now tax-exempt (0% GST).
Key Changes and Impact on Consumers
Item Category | Old GST Rate | New GST Rate | Impact (Cheaper/Costlier) |
Daily Essentials (Soaps, Shampoo, Toothpaste, Utensils) | 18% or 12% | 5% | Cheaper |
Packaged Foods (Butter, Ghee, Namkeens, Packaged Juices) | 12% | 5% | Cheaper |
Electronics/White Goods (ACs, TVs, Dishwashers, Monitors) | 28% | 18% | Cheaper |
Small Cars/Motorcycles (Petrol ≤1200cc, Diesel ≤1500cc, Bikes ≤350cc) | 28% | 18% | Cheaper |
Construction Materials (Cement, Tiles, Paints) | 28% | 18% | Cheaper |
Individual Insurance (Life & Health Premiums) | 18% | 0% (Exempt) | Cheaper |
Personal Services (Gyms, Salons, Yoga Services) | 18% | 5% | Cheaper |
Luxury/Sin Goods (Luxury Cars, Pan Masala, Aerated Drinks) | 28% + Cess | 40% | Costlier |
Benefits of GST 2.0
Affordability for the Common Man:
By moving most essential and high-consumption daily goods (like soaps, appliances, and small cars) to the lower 5% or 18% slabs, the cost of living is expected to decrease, improving household savings.Ease of Doing Business:
The reduction from four main rates to two makes tax classification and compliance simpler for businesses, especially MSMEs (Micro, Small, and Medium Enterprises), and is expected to reduce compliance disputes.Correction of Inverted Duty Structure:
The rationalization helps correct anomalies where inputs were taxed higher than the final product, leading to better working capital management for industries like textiles and fertilisers.Economic Boost:
Lower rates on key consumer and construction goods are designed to stimulate demand in sectors like automotive, consumer durables, and real estate, fueling economic growth.
Example:
Parameter | Old GST Structure | New GST 2.0 Structure (5% & 18%) | Direct Impact |
Old Slab | 28% (Applied to most large appliances) | – | – |
New Slab | – | 18% (Standard Rate) | – |
Cost | Refrigerator priced at $40,000 | Refrigerator priced at $40,000 | – |
GST Paid | $40,000 × 28% = $11,200 | $40,000 × 18% = $7,200 | $4,000 Savings |
Final Price | $51,200 | $47,200 | $4,000 Cheaper |
Conclusion:
5% (The Essential Rate):
This low rate applies to daily necessities (like basic food items, personal care products, and essential services).- Simple Result: The cost of living for the common person goes down.
18% (The Standard Rate):
This becomes the main rate for most manufactured goods and services (like electronics, standard cars, construction materials, and common services).- Simple Result: Many consumer goods are cheaper because they moved down from the old 28% rate, encouraging people to buy more.
40% (The Luxury/Sin Rate):
This very high rate is kept only for items like tobacco and luxury cars.- Simple Result: Revenue is protected, and consumption of these specific goods is discouraged.
By clearing out the confusing 12% and 28% middle slabs, the system is easier for businesses to comply with, and the majority of products and services become less expensive for the average consumer. This aims to boost spending, which helps the economy grow.