GST 2.0 Kicks In: Will Indian Households Truly Save Money?

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The Modi government’s sweeping GST 2.0 reforms slash tax slabs, promise cheaper essentials, and aim to boost consumption ahead of the festive season—but will the middle class and poor feel the real savings?

By PRADEEP KUMAR PANDA

Bhubaneswar, September 23, 2025 — India entered a new phase of tax reform on September 22, 2025, as the government rolled out what Prime Minister Narendra Modi has called a “GST Savings Festival.” The announcement was timed to coincide with Navratri, an auspicious season of consumption, and promises to ease the burden on the middle class and poor by cutting costs on hundreds of everyday items.

But as with every sweeping reform, the real question lingers: will the promised ₹2.5 lakh crore savings materialize for households, or will GST 2.0 remain more of a festive headline than a structural fix?

The Anatomy of GST 2.0

The first iteration of the Goods and Services Tax (GST), launched in July 2017, was hailed as India’s biggest tax reform since independence. It unified a fragmented system of state and central taxes into one comprehensive framework. Yet, its multi-slab structure—5%, 12%, 18%, and 28%—bred confusion, disputes, and compliance burdens.

GST 2.0 seeks to change that. The new regime simplifies tax slabs to just three:

5% for essentials and daily-use goods: food grains, medicines, dairy basics, educational products.
18% for most consumer goods and services: manufacturing, transport, electronics, and household appliances.
40% for luxury and “sin” goods: tobacco, pan masala, aerated drinks, premium cars, casinos, and online gaming.

This rationalization affects 375 items—from automobiles and electronics to kitchen staples and medicines—making them significantly cheaper.

Where Households Will Save

The most direct relief will be felt in daily essentials. Roti, chapati, and paratha are now fully exempt, while butter, paneer, ghee, cheese, and packaged foods like biscuits, pasta, and namkeens are down to 5%. Dry fruits—once taxed at 12%—are now in the 5% slab, making almonds, cashews, and pistachios more affordable.

Healthcare and education, often overlooked in taxation debates, are major winners. Life-saving drugs, diagnostic kits, glucometers, and medical devices are either tax-free or at 5%. The abolition of GST on life and health insurance alone is expected to save households ₹5,400 annually on average.

Appliances and electronics—symbols of middle-class aspirations—are now cheaper. Washing machines, dishwashers, and televisions move from 28% to 18%, saving families thousands. A Whirlpool AC, for instance, will cost ₹4,500–₹5,200 less.

Automobiles, long burdened by steep taxes, are perhaps the biggest beneficiaries. Small cars now fall under the 18% bracket, with the cess scrapped entirely. A Maruti Alto K10 could be cheaper by ₹1.07 lakh. Even mid-range cars will see reductions of ₹40,000–₹50,000, with added savings from lower insurance premiums and road taxes.

The government estimates that most households could save ₹3,000 annually on essentials, excluding big-ticket purchases. For India’s middle class, this could mean more money to spend—or more to save—during a period of slowing growth and sticky inflation.

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The Flip Side: What Gets Costlier

Reforms are never one-sided. Luxury and sin goods face the steep new 40% slab. Cigarettes, gutkha, zarda, aerated drinks, and premium vehicles are clear targets. Activities like casinos, horse racing, and IPL tickets now carry the same punitive rate.

Even clothing above ₹2,500—a middle-class indulgence rather than a luxury—has moved from 12% to 18%, a move that may pinch families during festival shopping. Similarly, premium beauty products and high-end services will attract higher taxes, marking a clear shift in the government’s attempt to redistribute spending power.

Why Now? The Political and Economic Timing

The timing of GST 2.0 is as political as it is economic. With Trump’s second administration imposing tariffs globally, India has leaned on domestic demand to keep growth buoyant. A festival-linked tax cut was almost inevitable to stoke consumption.

Prime Minister Modi framed the move as a gift to households and a ₹2.5 lakh crore savings package, but the reforms also reflect a pressing need to counter slowing private investment and boost confidence ahead of upcoming elections.

The government is betting that easing costs on essentials will expand disposable income, while higher taxes on luxuries will not significantly dampen demand among the wealthy. It is, in essence, a Robin Hood-style redistribution, cloaked in the language of tax simplification.

The Long Arc of GST: From Vajpayee to Modi

To appreciate GST 2.0, one must revisit its long gestation. Conceived in 1999 during Atal Bihari Vajpayee’s tenure, refined through the Asim Dasgupta and Vijay Kelkar committees, and revived under P. Chidambaram, GST was finally implemented in 2017 by Arun Jaitley.

Yet, its launch was controversial—hailed as historic but boycotted by much of the opposition, who dubbed it a “Gabbar Singh Tax.” Critics argued it burdened small businesses, increased compliance headaches, and unfairly taxed essentials.

Over the years, these criticisms stuck. The World Bank, in 2018, called India’s GST one of the most complex globally. Small businesses complained of refund delays, digital filing glitches, and disproportionate tax rates on basics like bicycles.

GST 2.0 is thus not just a reform; it is an admission that the earlier design was flawed.

Will the Savings Last?

The immediate relief is undeniable. Essentials are cheaper, insurance is lighter, cars are affordable, and electronics are within reach. But whether households feel sustained benefits depends on three factors:

Inflation Pass-Through: Retailers must pass the tax cuts to consumers. Past experience shows benefits often get absorbed by intermediaries.
Fiscal Trade-Offs: With a reduced tax base on essentials, the government may face revenue shortfalls, prompting borrowing or future hikes elsewhere.
Behavioral Shifts: Will households spend their savings, boosting demand, or tuck them away amid uncertainty?

If GST 2.0 sparks a consumption boom, it could offset revenue losses. But if inflation eats into savings or fiscal deficits rise, the “savings festival” could fade into disillusionment.

A Step Forward, With Caution

GST 2.0 is bold, simplified, and consumer-friendly. For the first time in years, the middle class and poor see tax relief tailored to their needs rather than burdens on their wallets. The symbolism of launching it on Navratri underscores its intent: a festival of savings, not sacrifice.

Yet, beneath the cheer lies caution. Tax reforms are rarely smooth, and GST’s troubled history reminds us that design flaws can unravel bold promises. For now, households will celebrate cheaper essentials and cars, but economists and policymakers alike must watch whether GST 2.0 can balance savings for families with sustainability for the state.

India has taken a significant step, but whether it becomes a milestone in inclusive growth or another chapter of missed opportunities will depend on execution, compliance, and the discipline of both government and markets.

(This is an opinion piece, and views expressed are those of the author only)