GST 2.0 FAQs: How new tax slabs will impact cars, EVs, FMCG. Everything you need to know

Nirmala Sitharaman at the GST Council press briefing.

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In an impromptu press conference on Thursday, held at 10:00 PM to brief about the outcome of the GST Council meeting, Finance Minister Nirmala Sitharaman announced sweeping GST reforms in what could be described as the most significant overhaul of India’s indirect tax regime since its launch in 2017.Aimed at boosting the consumer sentiment, while giving an overall push to the consumption growth, the move assumes significance amid the pall of gloom overshadowing the economy due to the Donald Trump-led administration’s steep tariff hikes on Indian exports, which have rattled trade flows and dampened business confidence.Here are answers to the key questions that can pop up in your mind related to the new indirect tax changes introduced:

When will GST 2.0 come into effect?

The revised GST regime will be implemented from September 22, 2025. The timing is significant, as it coincides with the festive season when consumption typically peaks. Policymakers expect this to boost demand across automobiles, FMCG, and insurance sectors.

How many tax slabs were there earlier?

The earlier GST framework had four major slabs (5 per cent, 12 per cent, 18 per cent, 28 per cent) plus additional compensation cess on items like luxury cars, cigarettes, and aerated drinks. This made the system complicated and prone to disputes. Policymakers, time and again, have raised the concerns of the convoluted tax structure, drawing comparison between the simplified GST versions in other countriesGST 2.0 aims to:

• Simplify the tax structure.
• Boost consumption of essentials and affordable vehicles.
• Ensure revenue neutrality for states while gradually phasing out compensation cess.

What is the new tax structure under GST 2.0?

5 per cent GST → for essential goods, FMCG items, electric vehicles.

18 per cent GST → for standard goods and services, including small cars and most two-wheelers.

40 per cent GST → for luxury and sin goods (large cars, SUVs, motorcycles >350 cc, private jets, yachts, sugary beverages).

Exemptions → health and life insurance premiums, basic food staples (e.g., chapati, paratha).

How does GST 2.0 impact small cars?

• Buyers of small cars are the biggest winners.
• Earlier: Effective tax ~29–31 per cent (18 per cent GST + cess ranging up to 22 per cent).
• Now: Flat 18 per cent GST.
• Impact: Ex-showroom prices may drop by 12–12.5 per cent, making hatchbacks and compact sedans more attractive to middle-class families.
• Policy intent: To revive demand for small cars, where sales have stagnated.

What about mid-size and large cars?

The burden has eased slightly but remains high.

• Earlier: Total tax 45–50 per cent (including cess).
• Now: Flat 40 per cent GST, no cess.
• Impact: Marginal relief expected for buyers of premium sedans and SUVs, though luxury demand is unlikely to surge.

How are motorcycles taxed now?

• Up to 350 cc (commuter bikes, scooters, entry motorcycles): GST cut to 18 per cent.
• Above 350 cc (Royal Enfield, Harley-Davidson, big bikes): Higher 40 per cent GST.
• Impact: Affordable two-wheelers become cheaper, supporting rural and middle-class mobility. Big bikes remain aspirational, keeping revenue intact.

What happens to electric vehicles (EVs)?

EVs retain the 5 per cent GST rate, among the lowest globally.

• Impact: Continues to incentivise EV adoption in India, aligning with the government’s decarbonisation and “Atmanirbhar EV ecosystem” agenda.
• Comparison: In many countries, EVs are taxed at 10–15 per cent, so India remains globally competitive.

What about the tractors and farm equipment?

Several farm-related products — including tractors and composting machines — will now be taxed at 5 per cent GST, down from the earlier 12 per cent
Impact: With tractors and implements more affordable, smaller farmers may adopt mechanisation faster, improving productivity.

Is there any relaxation for the auto component industry?

All auto components have been brought under a uniform 18 per cent GST slab, long-pending demand from the industry.

Impact: The move will curb the grey market, encourage the use of quality compliant components, ease compliance, and support MSMEs.

How are luxury transport items treated (jets, yachts)?

Non-essential luxury transport is taxed at 40 per cent GST.

• Earlier: Around 31 per cent plus cess.
• Now: Higher but simplified.
• Impact: Signals a clear “luxury should pay more” policy stance, while also streamlining cess collections.

Will insurance premiums be cheaper now?

Yes, significantly.

• Earlier: Health and life insurance premiums attracted 18 per cent GST.
• Now: Fully exempt from GST.
• Impact: Lower costs for policyholders, especially for term life and health policies. This may improve insurance penetration in India, which remains among the lowest in Asia.

What happens to cigarettes and tobacco products?

No immediate relief — they remain under the old structure of 28 per cent GST + compensation cess, keeping the effective tax close to 88 per cent.

Rationale: States still need cess revenue to repay borrowings made during the COVID-19 compensation phase.
Impact: Cigarettes remain heavily taxed, discouraging consumption, while ensuring state revenues remain protected.

Which everyday essentials get cheaper?

A wide range of daily-use goods now fall into the 5 per cent or 0 per cent GST bracket:

• 5 per cent GST: soaps, shampoos, hair oil, cornflakes, noodles, biscuits, namkeen, packaged juices, TV sets, and household appliances.
• 0 per cent GST: chapati, paratha, basic cereals, drinking water.
• Impact: Lower household expenditure, especially for middle- and lower-income families.

What are the broader economic implications?

For consumers: Relief on small cars, two-wheelers, essentials, and insurance. Luxury consumption remains heavily taxed.

For industry: Automakers may see demand revival in the small car and two-wheeler segments. Insurance companies could benefit from higher policy uptake.

For government: Simplified slabs reduce litigation, improve compliance, and ensure steady revenue.

For states: Compensation cess on tobacco and sin goods will continue until debt obligations are cleared.

With the collapse of multiple slabs into a simplified structure, the government has answered the long-pending demand of consumers, industry and market pundits. However, as the immediate euphoria subsides, it remains to be seen how this pre-Diwali bonanza will result in propping up the consumer sentiment and unleash the animal spirits in the economy in the long-term.

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