What Is a Two-Tier Tax Structure? A Simple Guide for Everyone

The Goods and Services Tax (GST) Council has announced major reforms to the existing indirect tax system following the 56th GST Council meeting. The new GST structure will replace the long standing multi-tier structure with a simplified two-tier structure. Under the new two-tier tax structure, all goods and services will be taxed under two broad slabs of 5% and 18%.

The new GST structure is set to come into effect from September 22, 2025, reducing the indirect tax on various essential and day-to-day goods while imposing a separate 40% GST on luxury items like large cars and other sin goods.

What Does Two-Tier GST Mean?

A two-tier tax structure essentially means that once into effect, there will be only two main GST rates instead of the existing multi slab GST structure. Earlier, GST was imposed through four different rate slabs namely a 5%, 12%, 18%, and 28% slab. With the new two-tier structure in place, most goods and services will fall under either 5% or 18% slabs, making the system more simple and predictable.

The welcoming move came after PM Narendra Modi’s announcement during this year’s Independence Day speech, where he highlighted how the middle class and common people will benefit from a reformed GST system. The decrease in GST slabs is aimed to lower the tax burden on common taxpayers and enable ease of business with automated refund and registration processes.

What Are the New Slabs Under Two-Tier GST Structure?

The new two-tier slab will be implemented this month from the very first day of Navratri on all goods and services save for tobacco and tobacco-related goods.

Under the new slab, various product categories will be taxed at either the lower 5% slab or the higher 18% slab. Below are some notable goods and services that will benefit from this two-tier slab.

• Daily essentials such as hair oil, shampoo, toilet soap bar, toothpaste, toothbrush, and shaving cream will fall under the 5% tax slab instead of the earlier 18% slab. Similarly, items like butter, ghee, cheese and dairy spreads will also attract a lower 5% GST slab instead of the earlier 12% slab.
• In the healthcare sector, individual health and life insurance policies will attract no GST compared to the earlier 18% slab. Corrective spectacles will now attract a 5% GST instead of the earlier 12% GST slab.
• In the education sector, stationary items like maps, charts, globes, exercise books and notebooks have been exempted from GST, replacing the earlier 12% rate.
• In the agricultural sector, equipment like tractors, drip irrigation systems and sprinklers will attract a reduced 5% GST instead of the earlier 12% GST rate.
• In the automobile sector, petrol, diesel, and CNG cars under 4 metres length will be taxed at 18% slab bringing it down from the earlier 28% slab. This will also apply to motorcycles under 350cc.
• Electronic appliances such as ACs and TVs (above 32 inches) will now attract an 18% GST rate instead of the earlier 28%.

What Falls Under the 40% GST Slab?

The new two-tier GST structure will also have a higher tax slab of 40% for luxury and sin goods only. Some of the items that will fall under this slab are as follows:

• Luxury cars (petrol and diesel cars above 1200cc and 1500cc respectively, and more than 4 metres in length will be taxed at 40% compared to the previous 28% slab.
• Motorcycles with more than 350cc engine capacity will be taxed under this 40% slab.
• Aerated and sugary beverages, including caffeinated beverages will also be taxed at this higher slab.
• Tobacco, cigarettes and other related sin goods will also fall under this slab.

To Conclude

The new two-tier GST structure is a welcome reform aimed at making indirect taxation simpler and relevant. The move is expected to lower prices on daily-use items, improve compliance, and bring more transparency to the system. With fewer slabs and clearer categories, GST is now easier to understand and more aligned with everyday needs.

Frequently Asked Questions

Is GST structure two-tier?

As per the new GST reforms set to come to effect from September 22, 2025, all goods and services will be taxed under a broad two-tier GST slab. This will replace the earlier multi-slab GST structure.

What are the two GST slabs under the new reform?

The two new GST slabs under the new reform are the 5% slab and the 18% slab.

What is the 40% GST slab for sin goods?

The 40% GST slab will apply to luxury items such as large cars and sin goods like tobacco and tobacco-related products.