Now, the question many are asking is whether the GST 2.0 reform will push prices higher or lower for consumers.
New Rate Structure
The revised GST framework eliminates the 12% and 28% slabs, retaining the 0%, 5%, and 18% brackets, along with a 40% demerit rate for sin and luxury goods. Certain special rates below 5% also remain.
According to reports, of the 546 goods affected by the changes, over 80% will face rate reductions, while 20% will see increases. Analysts suggest that while post-tax prices for most goods are likely to decline, the fall in prices will generally be smaller than the percentage reduction in tax rates.
Impact on Inflation and Consumption
Consumers may benefit from higher disposable incomes, particularly for necessities taxed at 5%. While demand for essentials is relatively inelastic, the additional income could, over time, stimulate purchases of higher-taxed comfort and luxury items. This may partly offset initial revenue losses, though the immediate impact is expected to be a reduction in government receipts.
GST Rate Cuts May Ease CPI Inflation
According to a report by Moneycontrol, the GST rate reductions coming into effect on 22 September are likely to ease retail inflation, provided businesses pass on the benefits to consumers.
The report notes that levies will fall on everyday essentials such as butter, ghee, paneer, soap, hair oil, shampoo and conditioners. Fruit juices will also become cheaper. In contrast, non-alcoholic beverages will face a higher 40% tax, up from 18%.
The steepest cuts will be in discretionary spending, Moneycontrol highlighted. Biscuits, chocolates, ice creams, sweets and beauty services will now attract a 5% GST, down from 18%. Motorcycles will also become more affordable as taxes drop from 28% to 18%, while bidi smokers will see the levy cut by 10 percentage points to 18%.
In household electronics, including air conditioners and televisions, GST rates have been lowered by 10 percentage points to 18%. Food and beverages overall will see fewer changes, with only 9% of items affected, while around 12% of service categories stand to benefit. Nevertheless, the relief could be meaningful. For instance, butter inflation stood at 5.7% in July, jams and jellies at 4.4%, carpets at 17%, and toilet soap, lotions and hair oil at around 5%, Moneycontrol reported.
Will Inflation Ease by up to 1 Percentage Point?
HSBC expects the GST rationalisation to have a direct impact on headline inflation. In a note dated 4 September 2025, the bank said, “We estimate that the tax rate cuts can lower headline CPI inflation by around 1ppt if producers pass on all benefits to consumers. If the pass-through is only partial, the inflation fall could be closer to 0.5ppt. We expect the RBI to cut rates once again by 25bp in 4Q25, taking the repo rate to 5.25%.”
Outlook
While GST 2.0 is designed to simplify the tax system and make essential goods more affordable, its impact on prices will vary across categories. Consumers are likely to enjoy some relief on everyday items, but the broader inflation trajectory will depend on government fiscal measures and wider macroeconomic conditions.
