Massive GST Rate Cut Proposed On Over 150 Items; Revenue Hit Pegged At Rs 50,000–60,000 Crore

In a bold move to ease the tax burden on households and boost consumption ahead of the festive season, the Indian government has proposed a significant overhaul of the Goods and Services Tax (GST) structure. The GST Council, in its crucial two-day meeting scheduled for September 3-4, 2025, will deliberate on slashing GST rates on over 150 items, potentially shifting them to lower tax slabs or exempting them entirely. While this reform promises substantial relief for consumers, it comes at an estimated revenue loss of Rs 50,000–60,000 crore annually for the Centre and states. Here’s a detailed look at the proposed changes, their implications, and what they mean for consumers and the economy.

The Proposed GST Rate Cuts

The Centre’s proposal aims to simplify the current four-tier GST structure (5%, 12%, 18%, and 28%) into a streamlined two-tier system of 5% and 18%, alongside a 40% rate for luxury and sin goods. Key highlights include:

• Expansion of the Nil GST Category: Everyday food items like loose paneer, khakhra, pizza bread, chapati, and roti, currently taxed at 5% to 18%, are proposed to be fully exempt. This move aims to reduce costs for millions of Indian households.
• Shift from 12% to 5%: Essential items such as butter, condensed milk, jams, namkeens, mushrooms, dates, and various nuts are set to move from the 12% slab to 5%, potentially lowering prices noticeably.
• Reduction from 18% to 5%: Popular packaged treats like chocolates, pastries, ice cream, and breakfast cereals like cornflakes may see their GST slashed from 18% to 5%, appealing to urban consumers and younger demographics.
• Education Sector Relief: Items like maps, globes, pencil sharpeners, exercise books, graph books, and lab notebooks are proposed to move from 12% to nil, offering cost savings for students and parents ahead of the academic year.
• Consumer Goods and Services: Daily-use items like toothpaste, umbrellas, pressure cookers, sewing machines, and small washing machines may shift to the 5% slab. Services such as construction-related work contracts and multimodal transport could also see reduced rates.

The GST Council, comprising Central and State representatives, is expected to finalize these changes, with a potential rollout around September 22, 2025, aligning with the Dussehra-Diwali festive season.

Economic Impact and Revenue Concerns

The proposed rate cuts are projected to cause an annual revenue shortfall of Rs 50,000–60,000 crore, equivalent to about 2.7% of the FY25 gross GST collections of Rs 22.08 lakh crore. Some experts, however, estimate losses as high as Rs 1–1.43 lakh crore, depending on the extent of the cuts and the products affected. Despite this, officials are optimistic, arguing that increased consumption and improved tax compliance will mitigate the shortfall within six months. The government also expects surplus cess collections and higher-than-budgeted Reserve Bank of India dividends (Rs 2.7 trillion vs. Rs 2.1 trillion) to offset the impact.

The reforms are designed to stimulate demand, particularly in labor-intensive sectors like textiles, footwear, and consumer goods, which could benefit small and medium enterprises (SMEs). For instance, lowering GST on cement from 28% to 18% could reduce prices by 7.5–8%, boosting developer margins, while rate cuts on two-wheelers and small cars (from 28% to 18%) could save buyers Rs 60,000–1.3 lakh per vehicle.

Benefits for Consumers and Businesses

The GST rate cuts are poised to deliver significant benefits:

• Household Savings: With 99% of items in the 12% slab potentially moving to 5% and many in the 28% slab shifting to 18%, retail prices could drop by 4–5%. This is expected to ease inflationary pressures, with consumer price index (CPI) inflation projected to moderate by 20–60 basis points annually.
• Boost to SMEs: Industry leaders, including Chandrakant Salunkhe of the SME Chamber of India, highlight that lower GST rates on essentials like ghee (contributing Rs 35,000 crore in revenue) will enhance SME competitiveness and drive consumption.
• Sectoral Gains: Sectors like automotive (two-wheelers, small cars), consumer durables (air conditioners), textiles, and pharmaceuticals stand to benefit. Companies like Bajaj, Hero, TVS, Maruti, and cement manufacturers like UltraTech are expected to see improved demand and margins.
• Festive Season Stimulus: The timing of the rollout, ahead of Diwali on October 21, 2025, aims to capitalize on festive demand, encouraging spending on consumer goods and services.

Challenges and State Concerns

While the reforms promise economic benefits, they face challenges. States, which receive 50% of GST collections plus 41% of the Centre’s share, are wary of revenue losses, with some estimates suggesting they could bear a larger burden (up to 0.36% of GDP). The Congress party has called for extending the GST compensation cess, set to expire in March 2026, to cushion states against potential shortfalls. However, the proposed structure eliminates the cess, merging it into GST, which could complicate revenue-sharing arrangements.

Additionally, the removal of the 12% and 28% slabs may create an inverted duty structure in some sectors, like textiles, where inputs are taxed higher than finished goods. The government is addressing this by ensuring input tax credit (ITC) adjustments, but businesses will need oversight to pass on savings to consumers. The GST Appellate Tribunal, effective from October 1, 2024, will handle anti-profiteering complaints to ensure compliance.

Broader Economic Context

The GST reforms align with broader economic strategies, including personal income tax relief worth $15 billion and softer inflation, which are expected to boost household spending by Rs 5.31 lakh crore (1.6% of GDP). Finance Minister Nirmala Sitharaman has emphasized that these “next-generation” reforms will enhance transparency, reduce compliance burdens, and benefit SMEs, fostering a more open economy. However, the trade war with the U.S., marked by 50% tariffs on Indian exports, adds pressure to stimulate domestic consumption to offset export losses.

Conclusion

The proposed GST rate cuts on over 150 items mark one of the most significant reforms since the tax’s introduction in 2017. By slashing rates on essentials, exempting daily-use items, and simplifying the tax structure, the government aims to ease the cost-of-living burden and spur festive season spending. While the Rs 50,000–60,000 crore revenue hit poses challenges, the expected consumption boost and improved compliance could offset losses in the long term. As the GST Council meets on September 3-4, 2025, all eyes are on whether these reforms will deliver the promised economic stimulus and reshape India’s tax landscape for the better.

Sources: NDTV Profit, The Financial Express, Times of India, August-September 2025.