GST 2.0 and ripple effect on luxury, investments, and wealth planning

India’s indirect tax regime has undergone a structural shift. Announced on September 5, 2025, and scheduled to take effect from September 22, GST 2.0 rationalises the current four-tiered tax rate structure into a citizen-friendly ‘Simple Tax’ — a two-rate structure with a Standard Rate of 18% and a Merit Rate of 5%, along with a special de-merit rate of 40% for a select few goods and services. In the layers beneath, there are quieter implications for consumption patterns, capital flows, and the rethinking of certain financial instruments.

Changes in GST slabs 2025 - GST 2.0

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A simpler tax structure with strategic implications

The core of the reform is a reduction in complexity. The earlier multi-slab format has been flattened into three distinct rates:

• 5% for essentials and government-incentivised categories
  
• 18% as the new standard rate
  
• 40% for luxury and sin goods
  

What qualifies as “essential” has always been fluid, but in this case, the list has expanded significantly — ranging from farm tools to basic education supplies. The broader 18% category absorbs many mid-range items, while the 40% bracket is reserved for heavy vehicles, high-end electronics, tobacco, and other indulgent imports.

The changes are not limited to rates. The removal of compensation cesses in certain categories and exemptions for health and life insurance point to a more selective approach: simplify compliance, but also redirect behaviour.

Premium consumption revisited: from vehicles to home tech

The tax burden on high-capacity vehicles hasn’t shifted meaningfully. Cars above 1200cc (for petrol) and 1500cc (for diesel), including most full-size SUVs and imported models, remain in the 40% bracket. While minor cess reductions may ease invoice amounts, there is no significant reprieve to alter pricing tiers.

Electric vehicles and hybrids, however, enjoy preferential treatment. The new structure reinforces their positioning as future-forward assets — not just cleaner alternatives but smarter ownership choices. For large-ticket purchases, optics matter as much as utility.

In consumer electronics, the air conditioner stands out. Previously taxed at 28%, it now falls under the 18% slab. While the percentage drop may not seem large, on bulk upgrades or renovations the cumulative savings become tangible. It’s not transformative, but it’s enough to influence purchase timing.

Insurance gets a boost and a use-case refresh

Perhaps the most overlooked change is also the most significant: life and health insurance premiums are now exempt from GST. Previously taxed at 18%, these costs were accepted as standard, often without acknowledging their long-term impact.

The exemption applies across the board:

• Term life insurance
  
• Endowment plans
  
• ULIPs
  
• Health plans, including top-up and family floater covers
  

This doesn’t just cut immediate outgo. Over 20–25 years, the removal of GST reshapes the effective IRR on insurance-linked instruments, especially when they are part of broader estate plans. It eliminates friction and reopens the case for products previously dismissed as cost-heavy — such as single-premium term plans or high-ticket ULIPs, where GST had eaten into the investible portion.

Sectoral effects that may influence investment decisions

The reforms touch sectors differently, not just in taxation but in how they recalibrate cost structures and, eventually, margin profiles.

Renewables stand out, with equipment-related components taxed at 5%. This lowers capex for infrastructure companies in solar and wind, with the hope of translating into reduced power costs, competitive bids, and stronger balance sheets.

Healthcare and insurance benefit doubly: GST removal on premiums and concessional treatment of medical devices and diagnostics. Providers, distributors, and insurers may gain, particularly in preventive care and outpatient infrastructure.

Beauty, wellness, and lifestyle services fall under the 5% slab, but without input tax credit. Consumers benefit from lower prices, while operators face margin compression. This could drive consolidation or thinner profits, with volume-led players reaping short-term gains.

Strategic portfolio adjustments post-GST

GST 2.0 calls for selective reassessment, not wholesale reshuffling.

Insurance products once deemed inefficient deserve another look, as the removal of 18% GST makes them more attractive on a post-tax basis.

Equities in renewables and healthcare gain stronger narratives from tax-aligned cost structures, potentially improving sentiment or earnings. Discretionary consumption sectors — vehicles, electronics, lifestyle services — may see soft timing shifts as consumers adjust spending windows to tax benefits.

Conclusion: policy shifts are signals, not just rules

GST 2.0 introduces a more legible tax structure — two slabs, fewer cesses, and targeted exemptions. In isolation, it simplifies compliance and provides price relief. Its true impact will depend on business responses, margin shifts, and investor confidence.

The signals are clear: favour insurance for long-term protection, renewable infrastructure for structural growth, and moderation in luxury consumption. The rest will depend on how quickly companies and consumers adapt.

(The author is Naval Kagalwala, COO & Head of Products, Shriram Wealth)

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)