India’s GST Overhaul Gains Momentum: States Back Centre’s Two-Tier Structure, Luxury Cars Under Spotlight

In a major step toward rationalizing India’s indirect tax system, a panel of state ministers has endorsed the federal government’s proposal to restructure the Goods and Services Tax (GST) into a simplified two-tier framework. The recommendation, made during a two-day meeting held in New Delhi on August 20 and 21, 2025, signals growing consensus around the Centre’s plan to eliminate the existing 12 and 28 percent slabs and replace them with a streamlined structure of 5 and 18 percent, along with a special 40 percent rate for select demerit goods.

The panel also recommended that high-end luxury cars be brought under the highest GST slab, reflecting a broader push to align taxation with consumption patterns and equity principles. The proposal will now be placed before the GST Council, chaired by Finance Minister Nirmala Sitharaman, for final approval.

Key highlights from the ministerial panel’s recommendations

- Endorsement of a two-tier GST structure: 5 percent for merit goods and 18 percent for standard goods  
- Introduction of a 40 percent slab for demerit items such as tobacco, pan masala, and online gaming  
- Recommendation to classify high-end luxury cars under the 40 percent GST bracket  
- Proposal to move 99 percent of goods from the 12 percent slab to 5 percent  
- Suggestion to shift 90 percent of goods and services from the 28 percent slab to 18 percent  

Luxury cars and consumption-based taxation

The panel’s recommendation to include high-end luxury cars under the 40 percent GST slab is aimed at ensuring that premium consumption is taxed proportionately. This move is expected to impact vehicles priced above Rs 50 lakh, which currently attract 28 percent GST plus cess. The reclassification would bring them under the highest permissible GST rate, aligning them with other demerit goods.

- Luxury cars to be taxed at 40 percent under proposed structure  
- Existing cess may be merged into the new slab for simplification  
- Revenue impact expected to be neutral due to limited volume  
- Policy rationale based on equity and progressive taxation  

Centre’s proposal and strategic objectives

The federal government’s proposal seeks to simplify the GST framework, reduce compliance burden, and enhance tax buoyancy through increased consumption. The new structure is designed to benefit middle-class households, MSMEs, and the agricultural sector by lowering tax rates on essential and semi-essential goods.

- 5 percent slab to cover food items, medicines, and basic services  
- 18 percent slab to include electronics, garments, and processed foods  
- 40 percent slab reserved for luxury and sin goods  
- Centre and states to share revenue equally under revised structure  

Uncertainty over fiscal impact

Despite the endorsement, the federal government has not yet quantified the potential loss to the exchequer from the proposed GST rate cuts. State ministers have expressed concern over the lack of clarity, especially as some estimates suggest the annual revenue impact could range from Rs 60,000 crore to Rs 1.43 lakh crore. While the Centre expects increased consumption and improved compliance to offset the shortfall, states remain cautious about the fiscal implications.

- No official estimate released by the Centre on revenue loss  
- Independent economists project losses between Rs 1.2 to 1.8 lakh crore annually  
- States worry about disproportionate impact on their fiscal health  
- GST Council expected to address compensation and revenue-sharing mechanisms  

Next steps and Council deliberations

The recommendations will be placed before the GST Council in its upcoming meeting, likely scheduled for September 2025. If approved, the new structure could be implemented in phases starting FY26, with transitional provisions for businesses and tax authorities.

- GST Council to deliberate on final structure and implementation roadmap  
- Phased rollout expected to minimize disruption  
- Digital infrastructure upgrades to support new rate configuration  
- Stakeholder consultations to continue across sectors  

Looking ahead

The endorsement of the Centre’s GST reform proposal by the states’ ministerial panel marks a pivotal moment in India’s tax evolution. With luxury goods under scrutiny and simplification on the horizon, the new structure promises to make GST more equitable, efficient, and growth-oriented. However, the absence of a quantified fiscal impact leaves room for negotiation and caution as the Council prepares to finalize the framework.

Sources: Financial Express, Economic Times, Deccan Chronicle.