Govt’s Diwali gift promises lower taxes on cement, small cars, and FMCG

The government is set to roll out a two-tier GST structure by October, with 5% and 18% slabs that will cut taxes on daily-use goods such as cement, small cars, and FMCG. Announced by Prime Minister Narendra Modi as a “Diwali gift” for consumers, the overhaul aims to boost consumption, phase out the compensation cess, simplify rates, and reduce disputes—while keeping revenue buoyancy intact.

The Goods and Services Tax (GST) regime is poised for its most significant reset since its launch eight years ago, with the government preparing to implement a simplified two-slab structure by early October. The overhaul, described by Prime Minister Narendra Modi as a “Diwali gift” for consumers during his Independence Day address, is expected to reduce the tax incidence on daily-use and aspirational items, provide a major consumption push, and further streamline India’s indirect tax system.

Goods Likely to Become Cheaper

Items such as cement, small cars, air-conditioners, and several fast-moving consumer goods (FMCG) could see their tax burden reduced. According to the Finance Ministry, the reset is guided by three pillars: structural reforms, rate rationalisation, and ease of living. The government stated that the move will “enhance affordability, boost consumption, and make essential and aspirational goods more accessible to a wider population.”

Currently, GST has a four-tier structure of 5%, 12%, 18%, and 28%, along with cess on select products. Essential items like unprocessed food are exempt, while luxury and demerit goods such as tobacco and pan masala attract the highest tax incidence, sometimes exceeding 80% after cess. Under the proposed system, GST will be streamlined into a 5% merit rate and a standard 18% levy, with a small number of demerit goods—primarily tobacco-related products and possibly online gaming—falling into a new 40% bracket.

Proposed Changes and Reforms

One of the key aspects of the revamp is the removal of the compensation cess by December. With sufficient collections expected by November to repay loans taken to meet past shortfalls, this move will lighten the compliance burden.

In addition, several sectors are likely to benefit from reduced rates. Health and life insurance may shift from 18% to 5% with input tax credit, while lower levies are also being considered for renewable energy, handicrafts, pharmaceuticals, and agricultural machinery. This is expected to support productivity, mechanisation, and affordability in crucial industries.

The government has also proposed measures to address long-standing issues such as the inverted duty structure in sectors like textiles and fertilisers. Equalising input and output rates will help free up working capital and reduce disputes. Furthermore, initiatives such as completing 95% of GST registrations within three days, pre-filled returns, and faster automated refunds are on the table to improve ease of doing business.

Revenue and Economic Implications

While the simplification may marginally reduce the weighted average GST rate—already down to 11% from 15.5% at the time of its launch—experts believe it will not hurt revenues. Instead, the boost to consumption, coupled with improved compliance from simpler rates, is likely to sustain buoyancy. GST collections have hovered around 6.7% of GDP in recent years, significantly higher than in the early phase of the regime.

The Group of Ministers on Rate Rationalisation is expected to finalise proposals in the coming weeks, enabling the GST Council to deliberate on them before Diwali. If approved, the reforms could mark a turning point in India’s indirect taxation journey, reducing complexities, improving compliance, and giving consumers and businesses alike a reason to celebrate the festive season with renewed confidence.