By : Manish Kumar , Head of Economics Dept. and Nilesh A , Student of Economics at Easwari School of Liberal Arts, SRM University AP, Amaravati, Andhra Pradesh.
India’s economic landscape is poised for a transformational shift as the GST Council’s landmark decision to implement a simplified two-tier tax structure promises to unleash unprecedented economic momentum. The GST Council has dismantled the complex four-slab structure, consolidating indirect taxation into a streamlined framework comprising 5% and 18% rates, supplemented by a punitive 40% levy on luxury and sin goods. The reform, effective September 22, 2025, marks a strategic departure from revenue maximisation toward consumption stimulation, with the government voluntarily sacrificing ₹48,000 crore in immediate fiscal receipts to unleash long-term economic momentum. The consumer impact manifests across multiple dimensions of daily expenditure, delivering immediate tangible benefits through reduced prices on essential goods categories. Personal care items, including hair oil, shampoo, toothpaste, and toilet soap, have migrated from 18% to 5% GST, reducing costs for routine purchases that constitute significant portions of household budgets. Dairy products such as butter, ghee, and cheese have moved from 12% to 5%, while ultra-high temperature milk, chenna, and paneer now attract zero GST. Food items, including pre-packaged namkeens, bhujia, mixtures, pasta, instant noodles, chocolates, and cornflakes, have been repositioned from 12% or 18% to 5%, delivering substantial savings on packaged foods that form an increasing component of Indian dietary patterns. The GST Council’s comprehensive restructuring encompasses an extensive range of products across diverse categories, demonstrating the reform’s breadth and impact on consumer welfare. In the healthcare sector, individual health and life insurance policies now attract zero GST, reduced from 18%, while over 30 cancer drugs have been exempted entirely. This restructuring addresses long-standing concerns about tax complexity, cascading effects, and the regressive nature of India’s indirect tax burden, particularly on essential goods consumed by lower and middle-income households.
The economic implications of these reforms operate on fundamental principles of price elasticity of demand, where reduced tax rates translate directly into lower consumer prices, thereby stimulating demand across multiple sectors. When the GST on fast-moving consumer goods (FMCG) falls by one percentage point, consumption rises by approximately 0.23%. This modest elasticity reflects the relatively inelastic nature of essential staples and household items, as consumers continue to purchase similar quantities even when price changes are small. By contrast, consumer durable items such as air conditioners, televisions, motorcycles, and small cars exhibit far higher elasticity. Analysis of demand patterns indicates that moving from a 28% to an 18% GST rate can trigger a 15–25% increase in purchases of these goods. This reflects how discretionary spending on higher-value items is highly sensitive to price; a substantial tax cut translates into a meaningful drop in the out-of-pocket cost, encouraging households to accelerate or expand their purchases.
The GST restructuring delivers immediate tangible benefits to Indian consumers through reduced prices across essential goods categories, thereby increasing household disposable income and purchasing power. The reforms particularly benefit lower and middle-income demographics who spend proportionally higher percentages of their income on goods now subject to reduced taxation. This increased disposable income creates a virtuous cycle where consumers spend more, businesses expand production, employment increases, and economic growth accelerates. The ultimate beneficiary is the Indian consumer, who will benefit from lower prices, and the potential big boost to consumption in an economy that is already in growth momentum will be significant and may surprise on the upside. Also, it addresses critical input cost distortions that have long plagued Indian manufacturing competitiveness. The reduction of cement GST from 28% to 18% alone could decrease construction costs by
₹25-30 per bag, significantly impacting infrastructure and housing projects. Similarly, lower taxes on industrial inputs and capital goods will reduce manufacturing costs across sectors. Export competitiveness receives a substantial boost as the cascading effect of taxes gets eliminated throughout the production value chain. For sectors like textiles, handicrafts, and leather goods that are export-intensive and MSME-driven, the rate reductions provide crucial relief that enhances their ability to compete globally. This is particularly significant as Indian exporters face headwinds from potential US tariffs, making domestic cost reduction essential for maintaining market share. The GST Council’s decision to eliminate complex multi-tier structures addresses a longstanding concern of foreign investors who struggled with compliance complexities and unpredictable tax implications across different states and product categories. The unified two-tier approach creates clarity that facilitates investment decisions and operational planning for global companies considering India as a manufacturing destination. The GST reforms embody classic Keynesian economic theory, where government intervention through tax reduction stimulates aggregate demand. Research demonstrates that every rupee of reduced tax burden generates additional economic activity worth 2-3 rupees through the multiplier effect.
The reform also unlocks significant improvements in capital utilisation by eliminating cascading levies and inverted duty structures, thereby freeing working capital for investment in machinery upgrades, technology adoption, and expanded production lines. With lower input costs, manufacturers across sectors, from textiles to automotive, are poised to ramp up new capacity. Meanwhile, the unified GST framework is transforming India into a single domestic market, enabling producers to target local consumers nationwide without navigating state-by-state tax regimes. This seamless market access broadens the consumer base, as regional firms can now economically.
serve distant markets—whether it’s handicrafts from Rajasthan reaching Bengal or agrifood producers in Kerala supplying northern states—while reduced rates on essentials and durables democratise affordability across various income levels. Notably, the September 22 implementation, timed to coincide with Navratri festivities, maximises the rule’s impact during peak shopping season, even as companies deploy careful cost-transfer strategies ranging from absorbing transition expenses to adjusting pack sizes or issuing credit notes, to ensure that savings are passed on to consumers without disrupting inventory and pricing continuity.
The GST Council’s revolutionary reforms represent more than tax policy—they constitute an economic philosophy that prioritises growth through simplification, affordability through rationalisation, and competitiveness through cost reduction. The combination of increased disposable income, enhanced export competitiveness, controlled inflation, and sectoral stimulus creates a powerful economic cocktail that could catalyse national economic acceleration. With multiple policy levers aligning favourably for the first time in a decade, India appears poised for a consumption-led economic renaissance that could redefine its growth trajectory for years to come. This transformation through taxation exemplifies how bold policy decisions, grounded in economic theory and calibrated for practical impact, can unleash the full potential of the world’s most populous democracy.
