A Simpler GST for a Brighter Diwali: Two-Tier Tax Slabs with Special Rates to Light Up India’s Economy

India's Finance Ministry has proposed a simplified two-tier GST structure—"standard" and "merit" slabs—with special rates for a few essential items, aiming to improve compliance, ease business, and offer relief to consumers ahead of Diwali.

India’s much-discussed Goods and Services Tax (GST) system is poised for its most significant makeover since rollout in 2017. In a landmark proposal unveiled by the Finance Ministry on August 15, 2025, just hours after the Prime Minister’s Independence Day address, this reform aims to replace India’s current multi-slab tax maze with a streamlined two-tier system—“standard” and “merit”—with only a few select items subject to special rates.

1. What’s Driving the Change?

The motivation is clear: simplicity. Over the years, the GST regime—with slabs at 5%, 12%, 18%, and 28%, plus additional levies for luxury and demerit goods—has grown complex, creating compliance headaches for businesses and legal disputes. While GST was introduced to unify India’s indirect taxes, numerous rate tiers blurred that clarity.

By consolidating tax rates into just two slabs, the proposal targets sharp reductions in litigation and compliance costs, smooths out rate anomalies (including inverted duty structures), and streamlines the process for businesses, consumers, and government alike.

2. The Two-Tier Structure: Standard & Merit, with Special Cases

Under the new framework:

Standard slab: A baseline GST rate for most goods and services.

Merit slab: Targets essentials and socially sensitive items—like food staples, education services, or healthcare essentials—at a lower rate to ease the burden on vulnerable groups.

Special rates: Reserved for a narrow set of goods or services that require distinct treatment (like demerit goods, luxury items, or highly regulated categories).

This approach combines simplicity with flexibility—most taxpayers deal with just two rates, while policymakers retain scope to address equity and special categories.

3. Beneficiaries: Who Stands to Gain?

This reform isn’t just administrative—it has the potential to touch daily lives:

Households and common citizens: Essentials such as food, clothing, hotel stays, and beverages may see lower GST rates, especially if shifted into the “merit” slab.

Small businesses and MSMEs: Fewer slabs mean simpler invoicing, fewer errors, and reduced costs tied to filing and compliance.

Farmers, students, working class: As groups repeatedly cited as beneficiaries, they may save on essential items or services nudged into the merit slab.

4. Fiscal Tradeoffs & Timeline

Simplifying GST isn’t zero-cost. The GST compensation cess—a tax buffer for states—is set to expire. That expiry now frees fiscal space to design long-term, sustainable rate reductions without jeopardizing revenue flows.

Financial analysts estimate that moving heavily consumed items such as packaged food, apparel, beverages, and hotel services (currently in the 12% bracket) into the 5% slab—or selectively raising some to 18%—could produce a revenue loss of around ₹500 billion, equal to roughly 0.15% of GDP. Still, the knock-on effect may be a net fiscal stimulus of 0.6–0.7% of GDP for households in FY 2025-26.

As for timing: PM Modi invoked a “double-Diwali” promise during his Independence Day speech, committing to rolling out these next-generation reforms by Diwali (October 2025). A high-powered group of ministers and a committee have been tasked to review the framework and finalize proposals for the GST Council’s consideration.

5. Why This Moment Matters

Eight years since GST launch: With nearly a decade under its belt, India is finally calibrating all learnings into a meaningful reform.

Administrative relief just ahead of festive season: Diwali is India’s pivotal economic moment—simplified GST could spur spending and boost sentiment.

Building trust in the tax regime: Streamlining rates, reducing disputes, and ensuring predictability strengthens business confidence and compliance.

6. Potential Concerns & Watchpoints

Revenue impact for states: While the federal side may adjust, states must be assured their fiscal health isn’t compromised by revenue shifts.

Defining “special rates”: Ensuring precise, transparent criteria for goods that qualify for exemptions or higher rates will determine whether the reform stays simple—or devolves into complexity.

Implementation logistics: Systems, software, tax return designs, and awareness will need a synchronized update, especially for MSMEs often lag in tech adoption.

In Summary

India’s Finance Ministry proposes a two-tier GST system—“standard” and “merit”—with special rates for select goods, aimed at reducing complexity, litigation, and compliance burden, while providing relief to citizens and businesses.

The reform is expected to benefit consumers, MSMEs, students, and farmers, especially if essentials fall into the lower merit slab.

Rolling out by Diwali 2025, this move is framed as a "Diwali gift" to the nation—timed for maximum impact during the festive spending season.

Short-term revenue losses (estimated ₹500 billion) may be offset by overall economic uplift—a net gain of up to 0.7% of GDP for households.

The reform is the culmination of years-long deliberations, with the PMO already granting in-principle approval and the GST Council set to take final decisions.

Author’s Note

India’s GST journey began in 2017 with the promise of simplifying one of the world’s most complex tax systems. Fast forward to 2025, and we’re on the brink of another major leap—moving from complexity back toward simplicity. This reform, if implemented thoughtfully, could deliver tangible benefits just when citizens need it most—right before Diwali.

As this evolves, the real measure will be in its execution—streamlining systems, protecting revenue, and ensuring goods and services remain affordable. Here’s hoping that this reform illuminates not just our lanterns, but the lives of millions.

Sources

Economic Times – "India to simplify GST: Finance Ministry proposes two-slab system with special rates for select items"

Business Today – "Big GST shake-up: Only 2 slabs, lower taxes, and zero-hassle returns in new blueprint"

Reuters – "India PM Modi vows October cuts to goods and services tax"

The 

Times of India – "Big GST cheer for common man: Two-slab tax structure to replace multiple rates"

Moneycontrol – "Centre proposes to move to a two-slab GST structure"

Business Standard – "PM Modi GST reforms: Tax cuts, two-slab structure