The Impact of the 56th GST Council Meeting: What Happens to Goods Previously Taxed at 28%?

Posted On - 5 September, 2025 • By - Aditya Bhattacharya

Introduction

The 56th meeting of the Goods and Services Tax (GST) Council, held on 3rd September 2025, marked a watershed moment in India’s indirect tax journey. Since its introduction in July 2017, GST has been widely regarded as India’s most ambitious tax reform, consolidating multiple indirect taxes into a unified system. Yet, over the years, businesses and consumers alike raised concerns about the complex four-tier rate structure, which often created disputes and inflated prices in key sectors.

The Council has now approved a simplified rate structure with three bands:

  • 5% (Merit Rate) for essentials.
  • 18% (Standard Rate) for most goods and services.
  • 40% (De-Merit Rate) for sin goods like pan masala, tobacco, aerated beverages, and caffeinated drinks.

This article explores the impact of these changes with a special focus on goods that were previously taxed at 28%, many of which have now been shifted either to the 18% standard rate or the 40% de-merit rate. The discussion covers the implications for manufacturers, dealers, consumers, and the wider economy.

The End of the 28% Slab

When GST was introduced, the 28% slab was reserved for so-called “luxury” and “sin” goods. Over time, however, many items in this category were neither luxury nor harmful, but rather industrial inputs and consumer durables (such as cement and air conditioners). This created price distortions, reduced competitiveness, and discouraged consumption.

The September 2025 reforms have abolished the 28% slab for most goods, placing them into either the 18% band or the 40% de-merit band.

Shifted from 28% → 18%

  • Cement (all types including Portland, slag, and super sulphate cement).
  • Automobiles: Small cars, motorcycles up to 350cc, buses, trucks, ambulances.
  • Consumer Durables: Air conditioners, dishwashers, televisions (all sizes).
  • Auto Parts: Brought under a uniform 18% rate.

Shifted from 28% → 40%

  • Tobacco and related products: Pan masala, gutkha, bidis, cigarettes, reconstituted tobacco, nicotine substitutes.
  • Aerated and carbonated beverages.
  • Caffeinated beverages.

This rationalisation represents a two-pronged policy approach: making industrial and essential goods cheaper, while continuing to penalise consumption of unhealthy products.

Impact on Manufacturers

Pricing Strategy and Competitiveness

For manufacturers of goods shifted to 18%, the reduced GST burden translates into lower dealer acquisition costs. This allows two potential strategies:

  • Pass-through model: Reduce MRPs and stimulate higher consumer demand.
  • Margin retention: Maintain current MRPs but enjoy better margins.

In competitive sectors such as cement, autos, and consumer electronics, the expectation is that manufacturers will pass on at least part of the benefit, boosting volumes.

By contrast, for industries now taxed at 40% (such as tobacco and beverages), manufacturers face higher effective tax incidence. This will likely force companies either to raise retail prices (risking demand decline) or absorb part of the tax (eroding margins).

Input Tax Credit (ITC) and Liquidity

One of the chronic pain points in GST was the inverted duty structure, particularly in textiles, fertilisers, and some manufacturing segments. The Council has:

  • Corrected inverted structures (e.g., man-made fibres and yarn reduced to 5%).
  • Introduced a 90% provisional refund mechanism for inverted duty situations.

For manufacturers, this promises improved cash flow and better ITC utilisation, reducing working capital blockages.

Compliance Adjustments

Manufacturers will need to:

  • Update ERP and billing systems by 22nd September 2025.
  • Revise contracts with dealers and distributors to reflect the new rates.
  • Reassess credit positions to ensure transitional stocks purchased at 28% are properly accounted for.

Impact on Dealers

Cost of Procurement

Dealers purchasing from manufacturers will now pay lower GST on invoices for goods moved to 18%. This:

  • Reduces their working capital burden.
  • Increases the scope for competitive pricing.
  • Allows them to offer discounts or expand margins.

Inventory Transition

A practical challenge lies in managing pre-reform stock purchased at 28%. Dealers must:

  • Maintain proper purchase and tax records to claim ITC correctly.
  • Adjust for any price changes announced by manufacturers post-22nd September.

Market Demand and Sales Volumes

Lower effective prices for cement, cars, and durables will likely increase footfall and demand at the dealer level. Conversely, tobacco and beverage dealers may face lower volumes as consumers adjust to higher prices.

Consumer Perspective

For the consumer, the abolition of 28% GST on many common items means:

  • Cheaper cement → lower cost of homes and infrastructure.
  • Affordable automobiles → boost in personal mobility.
  • Reduced prices of TVs, ACs, dishwashers → greater penetration of consumer durables.

On the other hand, consumers of pan masala, tobacco, or sugary beverages will now pay steeper prices, aligning with the government’s public health objectives.

Case Studies

Case Study 1: Cement

A bag of cement priced at ₹400 under 28% GST had an effective tax of ₹112, total ₹512.

New rate 18%: GST falls to ₹72, total ₹472.

Impact: A reduction of ₹40 per bag. For large infrastructure projects, this translates into significant cost savings.

Case Study 2: Small Cars

A hatchback with ex-factory price of ₹5,00,000 attracted 28% GST = ₹1,40,000, total ₹6,40,000.

New rate 18%: GST = ₹90,000, total ₹5,90,000.

Impact: ₹50,000 cheaper for end-consumers, boosting demand in the auto sector.

Case Study 3: Pan Masala

A pan masala pack with base price ₹100 was taxed at 28% = ₹28, total ₹128.

New rate 40%: Tax = ₹40, total ₹140.

Impact: 9% rise in retail price, discouraging consumption and increasing government revenue

Broader Economic Impact

Infrastructure & Housing

Cheaper cement and construction inputs are expected to reduce overall construction costs. This supports:

  • Affordable housing projects.
  • Government infrastructure expansion.
  • Private real estate developers facing cost pressures.

Automobile Sector

The Indian automobile sector has faced cyclical slowdowns. Lower GST on small cars, two-wheelers, and buses:

  • Enhances consumer affordability.
  • Encourages fleet operators (e.g., public transport, logistics) to expand capacity.
  • Helps the sector recover and align with electric vehicle adoption.

FMCG & Consumer Durables

Lower tax on soaps, shampoos, toothpaste, and durables means:

  • Lower household expenditure.
  • Stimulated consumer demand.
  • Potential re-pricing of FMCG portfolios.

Tobacco & Sugary Beverages

The hike to 40% is intended as a public health measure. While revenues may increase in the short term, risks include:

  • Shift to illicit markets where enforcement is weak.
  • Reduced consumption of regulated products.

Compliance and Transitional Issues

Stock Purchased at 28%

Businesses must carefully manage inventories purchased prior to 22nd September. Transitional provisions allow ITC, but proper records and reconciliations are essential.

Contractual Adjustments

Supply contracts, long-term purchase agreements, and tender pricing must be revised to account for lower GST incidence.

Systems & Training

Companies should ensure:

  • ERP and billing systems updated.
  • Staff trained on new rate applications.
  • GST returns reflect revised rates from September onwards.

Forward-Looking Perspective

The Council’s move away from the 28% slab is both structural and symbolic:

  • Structural: Simplifies the tax rate framework, corrects inverted duty structures, improves ITC flow.
  • Symbolic: Signals a pro-consumer and pro-industry stance, while retaining deterrence on harmful consumption.
  • Over time, India may move towards an even simpler two-slab system (standard + de-merit), aligning with global VAT/GST best practices.

Conclusion

The abolition of the 28% GST slab is one of the most impactful tax reforms in recent years. For manufacturers and dealers of goods shifted to 18%, it represents a positive boost to demand, liquidity, and competitiveness. For industries moved to 40%, it signifies the government’s commitment to public health and revenue stability.

In practical terms, businesses should:

  • Reassess pricing and contracts.
  • Manage transitional inventories carefully.
  • Prepare IT systems and compliance teams for the new structure effective 22nd September 2025.

The impact on goods previously sold at 28% will be profound — cement and autos will become cheaper, stimulating growth, while sin goods will face heavier taxes, reflecting both fiscal and social priorities.