GST 2.0: Tax Cuts for Aam Aadmi, Losses for States, Heavy Duty 40% Rate for Rich – Expert Explains Impact
The Goods and Services Tax (GST) regime, launched in 2017, was hailed as one of the biggest indirect tax reforms in India. It sought to replace the complex web of state and central taxes with a unified structure, creating a common national market. However, the journey has not been without its challenges. In 2025, the Narendra Modi government has introduced what is being termed GST 2.0 — a revamped structure aimed at reducing the burden on the middle class and poor while ensuring that the wealthy contribute more through a steep 40% slab.
While the new reforms promise relief for the “aam aadmi,” they also raise concerns about state revenues and long-term economic sustainability. Let’s break down the implications of GST 2.0.
The Big Highlights of GST 2.0
- Tax cuts on essentials and mass consumption goods: Items like food grains, packaged essentials, medicines, daily-use electronics, and small appliances will now attract lower GST rates — between 0% and 5%, compared to the earlier 12–18%.
- Simplification of tax slabs: The earlier system had multiple slabs (0%, 5%, 12%, 18%, 28% with cess). Under GST 2.0, slabs have been restructured into three tiers:
- 0–5%: Essentials and daily-use goods
- 15%: Standard goods and services
- 40%: Luxury and “sin” goods
- 40% ‘super luxury’ rate: High-end cars, imported liquor, designer goods, luxury real estate, and premium services now face the steepest-ever GST rate in India.
- Focus on digital compliance: GST 2.0 relies heavily on artificial intelligence and blockchain-backed invoices to curb evasion, with real-time reporting integrated with the Income Tax database.
- Compensation to states reduced: While the Centre has promised short-term assistance, states fear significant revenue losses due to the lowering of standard tax slabs.
Relief for the Aam Aadmi
One of the strongest selling points of GST 2.0 is its focus on affordability for the middle and lower-income classes.
- Food and household goods cheaper: Staples like edible oil, flour, pulses, soaps, and sanitary napkins are either tax-free or fall in the 5% bracket.
- Electronics in reach: Mobile phones, laptops, and entry-level home appliances have shifted from 18% to 12% or lower, making them more affordable for students, professionals, and small businesses.
- Medicines and healthcare: Life-saving drugs and basic healthcare services are now exempt, while even non-critical medicines attract a mere 5% rate.
- Public transport and services: GST on railways, metro services, and public utilities has been slashed, directly lowering daily expenses for millions.
For the average family, this translates into lower household expenses and higher savings. Experts suggest that GST 2.0 could push consumption demand upwards, helping revive sectors like FMCG, electronics, and healthcare.
Why States Are Worried
Despite the public-friendly tax cuts, states are staring at significant revenue shortfalls. The earlier 18% slab contributed the lion’s share of GST collections. By reducing this to 15% and shifting many goods to lower categories, revenue is expected to decline.
- Fiscal stress: States dependent on GST share — especially those with limited industrial bases like Bihar, Odisha, and North-Eastern states — fear widening deficits.
- Compensation uncertainty: Under the original GST regime, states were compensated for losses for five years (till 2022). With GST 2.0, the Centre has offered a limited three-year cushion, after which states must manage on their own.
- Pressure on borrowing: States may be forced to increase borrowing or raise excise duties on alcohol, fuel, and property registration to compensate for lost GST revenue.
An expert from a leading policy think tank put it bluntly: “The aam aadmi may see relief in the short run, but states could pass on the burden indirectly through higher levies elsewhere.”
The Heavy 40% Slab – Hitting the Rich
The most debated feature of GST 2.0 is the introduction of a 40% rate, the highest ever in India’s tax system. The government argues that this progressive taxation model will ensure wealth redistribution and fund welfare schemes.
Items under the 40% slab include:
- Imported luxury cars and SUVs
- Premium real estate (above ₹10 crore)
- Imported liquor and cigars
- Designer apparel, handbags, and jewelry
- High-end club memberships, chartered flights, and luxury cruises
Impact on luxury market:
- Automobiles: High-end car dealers anticipate a 20–25% fall in sales as effective on-road prices shoot up.
- Luxury housing: Real estate developers fear reduced demand for ultra-luxury homes, although NRI buyers may still dominate this segment.
- Imported goods: Fashion and alcohol brands may shift strategy to produce or bottle locally to avoid heavy taxes.
Critics warn that such a high slab may push the luxury economy into the grey market or encourage smuggling. Supporters argue it is necessary for wealth parity in a country where the income gap remains stark.
Experts Weigh In
On economic growth
Economists are divided. Some believe lower rates for mass consumption goods will boost demand, creating a multiplier effect for growth. Others caution that revenue loss for states could derail development spending on infrastructure and welfare.
On inflation
GST 2.0 could temporarily reduce retail inflation as household goods become cheaper. However, indirect hikes by states (via excise, cess, or fees) may neutralize the benefit over time.
On compliance
The digitization push is being hailed as a game-changer. With AI-based matching of invoices, tax evasion could shrink dramatically, leading to better long-term collections.
On inequality
By taxing the rich at higher rates, GST 2.0 aims for greater equality. But as one tax analyst notes: “True equality comes from creating jobs and opportunities, not just redistributing through taxation.”
The Road Ahead
GST 2.0 is both ambitious and risky. It seeks to give breathing space to ordinary Indians grappling with inflation, while tightening the noose on the luxury sector. But the risks to state finances and the potential for indirect taxation elsewhere remain pressing concerns.
The success of GST 2.0 will depend on three key factors:
- Centre-state cooperation: Unless states are adequately compensated, friction between them and the Centre could grow.
- Compliance efficiency: Technology-driven tax collection must deliver results to offset reduced rates.
- Market adaptability: Businesses, both luxury and mass-market, must adjust to the new pricing dynamics.
GST 2.0 represents a bold attempt to make taxation more progressive and citizen-friendly. For the aam aadmi, it is immediate relief. For the states, it is a looming challenge. For the rich, it is a clear signal — contribute more to the nation’s coffers.
Whether this reform will be remembered as a “Robin Hood tax” or as a risky gamble will depend on how well the government balances the twin objectives of affordability and fiscal stability in the years ahead.
