A few days ago, the government announced GST 2.0, and it included several decisions that directly benefited the common man. But if you dig a little deeper, the real picture becomes clearer. Why were the GST slabs changed? Will this really reduce prices? And what will be the impact of this entire process on the multiplier effect, input tax credit, and the economy? Let’s understand it step by step.
Why was GST cut?
The obvious question is: if relief was to be provided to the people, why wasn’t income tax or corporate tax reduced? The answer is the multiplier effect.
The government had three options—an income tax cut, a corporate tax cut, or a GST rate cut. The multiplier effect indicates how much the government’s revenue sacrifice of ₹1 increases the economy.
- The multiplier effect of an income tax cut is only 1.01.
- The corporate tax cut is 1.02.
- While the GST rate cut has a multiplier effect of 1.08.
This means that if GST revenue is reduced by ₹1, the economy grows by ₹1.08. This is why the government chose to cut the GST rate. Furthermore, our GST structure was previously very complex—with multiple slabs like 5, 12, 18, and 28%. Most countries in the world have only one or two slabs. Now, the structure has been rationalized by removing the 12% slab and simplifying unnecessary categories.
Which categories were affected?
The impact of GST 2.0 will be most visible in three sectors.
1. Farm and Irrigation Equipment – Items like tractors and drip irrigation systems previously had a 12%–18% GST. Now, it has been reduced to 5%. This will reduce agricultural and grain prices.
2. Stationery and Education Items – Pens, pencils, and basic stationery previously had a 12% GST. Now, they have become completely tax-free, i.e., 0%. This is a major step to promote education.
3. Insurance Sector – Health insurance and life insurance premiums previously attracted 18% GST. Now, it’s 0%. Theoretically, this means policies will be significantly cheaper.
Will prices be that much cheaper?
The big question now is: does zero insurance GST mean that policies will directly become 18% cheaper? The answer is no.
Take an example. Suppose your premium is ₹100. Previously, it was subject to 18% GST, meaning you would have to pay ₹118. Now that GST has been removed, theoretically you should only pay ₹100. But the actual math is a little different.
If you apply an 18% discount on ₹118, the premium comes to ₹96, meaning the company would also have to reduce its base price. In reality, the premium will only be cheaper by roughly 15%.
And here comes the issue of input tax credit. Insurance companies incur costs for their operations, such as rent, phone bills, and IT services. GST is also levied on these. Previously, companies used to adjust the credit for these expenses from the GST they collected from customers. Now that insurance GST has become zero, there is no option to offset the credit. This means that companies’ costs will increase, and they will recover it by increasing prices.
The result will be that the actual discount will not be as much as the cut shown. Insurance premiums and stationery products may only be cheaper by 7–8%. The same logic will apply to tractors and irrigation systems.
who will benefit and who will not?
Now simply put, who will benefit and who will not:
Farmers will benefit because the price of tractors and irrigation tools will decrease. The impact of the GST rate cut will be felt directly by agriculture and the rural economy.
Students and parents will benefit because stationery is now GST-free. Education-related GST relief has affected stationery and study materials.
Insurance buyers will benefit slightly, but not as much as the headline numbers suggest. Luxury goods buyers will not be significantly affected; companies can increase margins.
There will also be some positive impact for small businesses and daily-use product buyers, as tax slabs have now been simplified and input costs have become more manageable.
Conclusion
The GST 2.0 rate cuts are an overall positive step. The structure has been simplified, some daily-use categories have received relief, and competition will remain healthy. However, it is also clear that the actual price cut will not be as significant as the discounts shown in the headline figures. The practical benefit will be around 7–8%.
If you are considering insurance plans, this change will prove beneficial in the long term. For details, you can check out in-depth analysis and policy comparison platforms related to insurance. Overall, GST 2.0 is a rational move for the economy, bringing some relief in the short term and better competition in the long term.
FAQs
Q1. What are the new GST slabs rates 2025-26?
Ans: These are new GST Slabs effecting after 22nd Sept. 2025.
- 5%:- Food items, life insurance, health insurance, household items.
- 18%:- Standard goods and services.
- 40%: Luxury and hazardous items like cigarettes, tobacco, and pan masala.
- 0%: Certain essential items, such as food grains and life insurance.
The Times of India
Q2. Will the new rates apply to old stock?
Ans: Yes, if goods are sold after September 22, 2025, the new GST rates will apply. If Input Tax Credit (ITC) has already been taken, it can be continued.
Q3. Is there any change in the GST registration threshold?
Ans: No, there is no change in the GST registration threshold. Only the tax rates have been revised.
Jagranjosh.com
Q4. Will GST be applicable on life insurance and health insurance?
Ans: Yes, GST will be applicable on life and health insurance services, but the rate will be 0%. This will make these services cheaper for customers.
Q5. Has the GST rate on luxury goods increased?
Ans: Yes, the GST rate on luxury and harmful goods has been increased to 40%. This includes tobacco, cigarettes, expensive cars, etc.
The Times of India