The changes under the new goods and services tax (GST) framework, effective from 22 September 2025, are expected to boost demand for essential and discretionary goods, particularly among India’s middle class. A CRISIL Ratings report says the government’s decision to reduce GST rates on 11 of the top-30 consumption items would ease household budgets and stimulate spending, but the outcome will critically depend on how much of the reduction is actually passed on to consumers.
The average GST on these top consumption items has come down from about 11% to 9%, with one-third of a typical household’s monthly expenditure now facing lower taxation. Goods such as milk-based products, medicines, processed food, footwear, two-wheelers, televisions and entry-level cars will become more affordable.
The rate on standard two-wheelers has been cut from 28% to 18%, lowering their prices by nearly 8%, while entry-level cars are expected to become cheaper by 8%–9%. The purchase value limit for availing 5% GST on clothing has been raised to Rs2,500, providing additional relief for middle-income families. CRISIL says this combination of essentials and discretionary products made the middle class 'the biggest winner' under the new regime.
The tax cuts, however, come alongside increases on premium products, the rating agency says. Clothing above Rs2,500 now attracts 18% GST, up from 12%, motorcycles above 350cc are taxed at 40% compared to 31% earlier, and high-end sports utility vehicles (SUVs) continue to face significantly higher levies.
CRISIL noted that this differentiation is deliberate, designed to give relief on mass-consumption goods while shoring up revenues through higher taxes on luxury items.
The report cautioned that the benefits of GST 2.0 will depend largely on the willingness of producers to pass on the reductions. International experience shows that passthrough can be uneven—France’s 2008 value added tax (VAT) cut for restaurants was only partially reflected in menu prices, while Germany’s temporary VAT relief during the pandemic took months to reach consumers. Durable goods such as cars and televisions are particularly sensitive to pricing, making full passthrough critical for the intended demand boost, CRISIL pointed out.
More than 20% of the consumer price index (CPI) basket is covered by GST cuts, while only 1.2% faces a hike. The share of items with zero GST has risen to 47% from 35.3%.
CRISIL says it believes this will help contain inflationary pressures, if producers transmit the reductions effectively. The reforms come at a time when consumption, which accounts for 57% of India’s GDP, needs to be supported through tax relief, lower borrowing costs and income-tax cuts announced earlier this year.
The government has estimated a short-term revenue loss of about Rs48,000 crore due to the rationalisation, but CRISIL says this was manageable given GST collections of Rs10.6 lakh crore in FY23-24.
Higher levies on premium categories and the inclusion of additional services such as e-commerce delivery under GST are expected to offset some of the losses, the rating agency says, adding that the move to simplify the structure into two slabs—5% and 18%—is also expected to improve compliance and widen the tax base.
The impact of the tax cuts will differ across households. According to the report, rural families, which spend nearly 26% of their monthly per capita expenditure on raw food items that already attract zero GST, are likely to see smaller incremental benefits. Urban households, on the other hand, stand to gain more due to their higher spending on processed food, personal services and consumer durables which now fall in lower tax brackets.
CRISIL estimates that in rural and urban areas, 11 of the top-30 consumption items have seen rate reductions, covering 28% of rural spending and 26% of urban spending.
Fast-growing categories such as processed foods, restaurant dining, mobile services and personal-care have also been considered in the rationalisation. While some have seen benefits, others remain taxed at 18%, reflecting the government’s balancing act between affordability and fiscal prudence, the rating agency says.
According to CRISIL, the effect of GST 2.0 will be gradual and felt over the next two years, depending on how quickly tax benefits flow through the supply chain to consumers and how demand responds in turn. “Lower taxes on essentials and selected discretionary items will boost purchasing power, especially for the middle class. If transmission is swift, it should ease inflation and strengthen demand,” the report concluded.
