India has launched its most sweeping tax overhaul since the Goods and Services Tax (GST) began in 2017, collapsing four slabs into two core rates and adding a steep 40 percent levy on luxury goods. Effective September 22, the move is aimed at reviving domestic demand as American tariffs threaten exports.

The Council consolidated most items into 5 percent and 18 percent brackets, scrapped GST on health and life insurance and 36 critical drugs, and shifted household staples and appliances into lower categories. Hair oil, butter, and cheese now attract 5 percent tax, while TVs, refrigerators, and small cars fall to 18 percent. Luxury cars, premium motorcycles, and tobacco will be taxed at 40 percent.

“This pivotal move aims to rationalize the tax regime, stimulate consumption, and bolster economic growth,” said Himanshu Sinha, partner at Trilegal. Finance Minister Nirmala Sitharaman said the reforms “prioritize middle-class relief while maintaining fiscal balance through higher taxes on luxury items.”

The cuts deepen the fiscal divide between Centre and states. States stand to lose INR 67,700 crore annually versus the Centre’s INR 28,300 crore, with gross losses projected at INR 1.11 lakh crore in FY26. Since GST accounts for over 40 percent of state revenues, budgets will come under pressure even as New Delhi bets rising consumption will soften the blow.

The overhaul comes weeks after President Donald Trump slapped tariffs of up to 50 percent on most Indian exports, hitting textiles, jewelry, and IT services. Economists expect the GST cuts could lift growth from 6.5 percent to 6.7 percent in FY26 and lower inflation by up to 75 basis points, cushioning trade shocks by shifting the growth engine to domestic demand.

Healthcare is one of the cleasrest beneficiaries. “The complete removal of GST on individual health insurance will have a positive effect in making health insurance more affordable as healthcare costs see an upward trend,” said Ashwin Sapra, partner and head of pharma and healthcare at Cyril Amarchand Mangaldas.

Curbing Disputes, Easing Compliance

The Council also moved to resolve contentious issues, including clarifying post-sale discounts. “This issue has been contentious since the inception of GST… aligning tax treatment with commercial realities,” said Jitendra Motwani, partner at Economic Laws Practice.

Simplification is expected to reduce classification disputes that once sparked litigation over items like parathas, coconut oil, and popcorn. “The decisions taken by the GST Council yesterday are expected to reduce disputes… since most of the similar looking goods have been clubbed together and attract the same rate of tax,” said SR Patnaik, partner and head-taxation at Cyril Amarchand Mangaldas. He added: “Bringing a closure to such potential disputes is expected to free up a significant amount of cash flows for the businesses.”

Exporters may also benefit from the planned deletion of Section 13(8)(b) of the IGST Act. “Its proposed removal could reclassify such services as exports under Section 16, enabling zero-rating benefits and the refund of blocked ITC,” said Rinkey Jassuja, partner at Economic Laws Practice.

Delivery Platforms Pulled Into the Net

Another significant decision was to bring local delivery services offered via e-commerce operators under GST at 18 percent. Platforms will now bear the liability where delivery partners are unregistered. “By taxing delivery at the platform level, the Council ensures that revenue is not lost due to the unregistered status of gig workers,” said Ankit Jain, partner at Ved Jain and Associates.

For delivery operators, often still burning cash to gain scale, the levy is a margin hit. “The GST Council’s decision… fundamentally reshapes the delivery economy,” said Alay Razvi, managing partner at Accord Juris. “With no input credit allowed, platforms will inevitably revisit pricing, delivery charges, and partner payouts, while overhauling invoicing and reporting systems.”

The financial hit is real: Zomato and Swiggy are each facing an annual GST burden of INR 180–200 crore, a cost likely split between customers, delivery partners, or the platforms themselves.

Execution Risks Remain

Concerns persist over inverted duty structures, especially in textiles and footwear. “The accumulation of credit on account of the input services (procured @18 percent) would be an area of concern, given that the textile sector functions on a very thin margin,” said Gopal Mundhra, partner at Economic Laws Practice.

Experts argue the reform brings GST closer to its original intent of simplicity. Renewable energy devices and manufacturing inputs now attract 5 percent, while textile fixes aim to boost competitiveness. “What’s crucial is that a robust mechanism addresses inverted duty structures so that genuine relief percolates to benefit consumers,” said Gourav Sogani, partner at Economic Laws Practice.

For now, New Delhi has opted for shock therapy—betting that cheaper essentials and healthcare will drive demand at home, even if states are left to pick up the fiscal tab.