Goods and Services Tax (GST) Council, in its 56th meeting on September 3, 2025, announced sweeping reforms to the country’s indirect tax framework, marking one of the most significant overhauls since GST was introduced. The Council decided to reduce the four existing tax slabs, 5 percent, 12 percent, 18 percent, and 28 percent, to just two core rates of 5 percent and 18 percent, while retaining a 40 percent rate for luxury and sin goods. The revised structure will come into effect on September 22, 2025.
The reform is expected to directly benefit households, the middle class, and small businesses by lowering prices of several food products and simplifying compliance. In a major relief to the food-processing industry, most items earlier taxed at higher rates have now been moved to the 5 percent slab.
Ultra-high temperature (UHT) milk has been fully exempted, while chocolates, biscuits, confectionery, pasta, cocoa products, ice cream, jams, juices, soups, namkeens, and plant-based milk drinks are among the products set to witness significant tax cuts. The reduction in rates is expected to translate into lower retail prices, making everyday food items more affordable and boosting overall consumption.
The simplified structure also addresses long-standing concerns such as the inverted duty structure, where inputs were taxed higher than finished products, creating cash flow and working capital challenges for manufacturers. By aligning input and output tax rates, the reform strengthens domestic value addition, eases liquidity pressure on MSMEs, and encourages investment in food-processing infrastructure. It also resolves classification disputes by placing similar goods in the same tax slab, reducing litigation risks and compliance hurdles.
Alongside rate cuts, the GST Council approved procedural reforms aimed at easing the compliance burden for businesses. These include streamlined registration and return filing, provisional refund mechanisms for inverted duty claims, and the establishment of the Goods and Services Tax Appellate Tribunal (GSTAT) to expedite dispute resolution. Collectively, these measures are expected to promote greater formalization, improve adherence to tax norms, and create a more transparent and stable business environment.
The broader economic impact of these reforms is expected to be significant. Lower GST rates are likely to stimulate demand for processed food products, leading to higher sales, increased production, and expansion of the sector. With businesses investing in capacity building and infrastructure, more employment opportunities are set to open up, benefiting both skilled and unskilled workers.
Farmers and food processors are expected to benefit from higher incomes as consumption increases, value addition enhances, and post-harvest losses decrease.
