GST Slab Changes reducing rates to 5% and 18% for daily-use goods offer hope for the middle class, but critics see a Bihar election ploy behind the timing. India’s Goods and Services Tax (GST), implemented in 2017 as a landmark reform, has been a contentious issue due to its complex structure and revenue losses for states. At the 56th GST Council meeting held on September 3-4, 2025, in New Delhi, chaired by Finance Minister Nirmala Sitharaman, a significant overhaul was announced. The existing four slabs (5%, 12%, 18%, and 28%) have been simplified to primarily two slabs (5% and 18%), with a new 40% slab for ‘sin goods’ (e.g., tobacco, pan masala) and luxury items. These changes will take effect from September 22, 2025, coinciding with the first day of Navratri. In his Independence Day speech on August 15, 2025, Prime Minister Narendra Modi called it a “Diwali gift,” promising relief for the common man, farmers, middle class, and MSMEs. However, is this a genuine economic reform or a political maneuver ahead of the Bihar Assembly elections (October-November 2025)? Experts and opposition parties suggest the timing aligns with electoral gains, but issues like revenue loss and regional impacts remain unresolved. This article explores these questions, regional effects, and the government’s compensation plans in detail.
GST Slab Changes: What’s the New Framework?
The GST Council has eliminated the 12% and 28% slabs. Now, 99% of items previously in the 12% slab will shift to 5%, while 90% of items in the 28% slab will move to 18%. Sin goods (tobacco, gutkha, pan masala, carbonated drinks) and super-luxury items (large-engine motorcycles, yachts, helicopters) will fall under the new 40% slab. Tobacco products will continue to attract the existing 28% GST plus compensation cess until the compensation loan is repaid.
Daily-use items will see relief. For example, hair oil, shampoo, toothpaste, soap, and toothbrushes will now be taxed at 5% (down from 12-18%). Milk, paneer, pizza bread, khakhra, and rotis are now GST-exempt (0%). Small cars (length under 4 meters, petrol engine up to 1200cc) and motorcycles (up to 350cc) will be taxed at 18% (down from 28%). TVs, refrigerators, washing machines, and air conditioners will also fall under 18%. Life-saving cancer drugs and medicines for rare diseases will attract 0% GST. Services like salons, gyms, and yoga centers will be taxed at 5% (down from 18%). Health and life insurance premiums will be GST-exempt.
These changes aim to reduce the Consumer Price Index (CPI) and boost consumption. According to the Union Finance Ministry, this will enhance ‘ease of living’ by reducing Input Tax Credit (ITC) complexities. However, the average GST rate will drop from 11.6% to around 10%, impacting revenue.
Bihar Election Ploy? Political Motive or Economic Need?
Many experts and opposition leaders link the changes to the upcoming Bihar elections. Bihar Deputy CM Samrat Chaudhary chairs the Group of Ministers (GoM) on GST rate rationalization, and the announcement comes just before the polls. Congress leader Jairam Ramesh remarked, “Is this due to sluggish growth, rising household debt, declining savings, Bihar elections, or Trump tariffs?” Former Finance Minister P. Chidambaram called it “eight years too late” but hinted at political motives. Opposition-ruled states (West Bengal, Kerala, Punjab) raised concerns about revenue losses, demanding the Centre guarantee 14% annual growth for five years.
The Centre, however, portrays it as an economic reform. In his August 15, 2025, speech, PM Modi termed it ‘Next Gen GST Reforms,’ based on structural changes, rate rationalization, and ease of doing business. The GoM report suggests it addresses inverted duty structures and reduces classification disputes. It’s also seen as necessary to boost exports affected by U.S. tariffs (due to the Trump administration). However, the timing (just before Diwali) suggests electoral gains, especially in Bihar, where consumer prices influence votes. Experts believe it’s partly political but will strengthen the economy in the long run.
The likelihood of reverting to old slabs in the next budget (February 2026) is low, as the GoM calls it a permanent reform. However, if the revenue shortfall (estimated at ₹93,000 crore) increases, revisions are possible. The opposition labels it an “electoral gimmick,” citing the lack of a clear compensation plan for states.
Sectors Impacted by New GST Slabs: Winners and Losers
Most sectors will benefit from the new slabs, but some will face losses.
Benefiting Sectors
- FMCG and Daily-Use Goods: Packaged food, snacks, juices, butter, and ghee will now be taxed at 5%. Small sachets (up to ₹10) will become cheaper, boosting consumer spending. Sector growth is expected at 10-15%. According to Hindustan Times, this will save the middle class 5-10%.
- Automotive: Small cars and motorcycles up to 350cc will be taxed at 18%. Companies like Maruti, Hero, and Honda will benefit. Electric vehicles remain at 5%. However, larger vehicles will face 40% tax, making them costlier.
- Consumer Durables: TVs, refrigerators, and ACs at 18% will see increased demand, with sector growth projected at 20%.
- Construction and Cement: Cement at 18% will make infrastructure projects cheaper, boosting real estate.
- Healthcare and Insurance: Individual health/life insurance at 0% and cheaper medicines will attract investment in healthcare.
- Textiles and Handicrafts: At 5%, exports will rise.
- MSMEs and Agriculture: Simplified structures will ease compliance. Tractors and agricultural machinery at 18% will provide relief to farmers.
These changes will enhance consumer purchasing power and boost GDP growth by 1-2%.
Affected Sectors
- Luxury and Sin Goods Traders: Tobacco, pan masala, and large vehicles at 40% will see a 20-30% price hike, reducing sales. Tobacco traders will face significant losses due to continued cess.
- Online Gaming and Demerit Goods: At 40%, the sector may face a 15-20% revenue loss.
- State Revenues: With 67% of revenue coming from the 18% slab, the reduced average rate could lower collections by 15-20%. Opposition states (Kerala, West Bengal) will be hit hardest.
- High-Value Electronics: Some items may shift above 18% if classifications change.
Losses will primarily affect luxury traders, with sales potentially dropping by 10-15%.
Government’s Compensation Plan: Addressing the Revenue Shortfall
The Centre deems the estimated ₹93,000 crore revenue shortfall “fiscally sustainable.” It aims to recover ₹45,000 crore through the compensation cess (until March 2026). Increased consumption is expected to improve GST buoyancy, offsetting the shortfall. States are guaranteed 14% annual growth, but opposition states demand the Centre borrow to compensate. The GoM suggests additional levies on sin goods to maintain revenue neutrality. Pre-filled returns and faster refunds will improve compliance and expand the tax base. However, if the shortfall grows, revisions may occur in Budget 2026. The Centre insists, “This is growth-oriented, not electoral.”
The GST slab changes offer relief to consumers, but the timing raises suspicions of electoral motives tied to the Bihar elections. FMCG, automotive, and other sectors will benefit, while luxury traders face losses. The government’s consumption-based compensation plan is promising, but unresolved state demands pose challenges. Overall, the reform simplifies the economy, but its implementation needs close monitoring.