GST Reform: Explaining the 40% Special Rate, Covering Luxury Cars, Yachts, Sin Goods and More

The latest GST reforms, labelled as ‘GST 2.0’, have changed the tax landscape. While most goods have moved to lower rates of 5 per cent and 18 per cent, the government has created a new 40 per cent slab, the highest in the regime.

This is not a rate that affects everyday essentials but a handful of products the government calls “sin goods” and a few ultra-luxury items.

What Are Sin Goods?

“Sin goods” is a global policy term for products seen as harmful to public health or society. In India, these goods include tobacco, gutka, pan masala, sugary or aerated drinks, and alcohol.

The idea behind such labelling is simple: If something damages health or has social costs (vis-à-vis consumption), it gets heavily taxed so people consume less of it while the government raises revenue to fund welfare.

Earlier, the government taxed these goods at 28 per cent GST plus a Compensation Cess. With the Cess now being phased out, the tax burden has been consolidated into one steep 40 per cent GST slab. That way, the government does not lose revenue and consumption continues to stay discouraged.

Why Is It Called A ‘Special Rate’?

The 40 per cent slab is called a “special rate” because it does not apply across the board. It is limited to a narrow category of sin goods and super-luxury products. The logic is:

• These items earlier faced 28 per cent GST plus Cess; merging them into 40 per cent keeps the effective rate unchanged

• The higher tax serves as a deterrent against the overconsumption of products that have negative health or social effects

• Some luxury items, like large cars, private yachts, or racing cars, are included because they already attracted the highest slab earlier

In other words, this is a targeted, not a general, tax measure.

Goods Under The 40 per cent Slab

Here’s what falls into the “special rate” basket:

• Tobacco and related products: cigarettes, cigars, gutka, pan masala, chewing tobacco, tobacco substitutes.

• Sugary and caffeinated drinks: aerated beverages, fruit-based carbonated drinks, caffeinated beverages, and other non-alcoholic drinks kept at par to avoid disputes.

• Luxury and personal-use vehicles: petrol cars above 1,200 cc, diesel cars above 1,500 cc, motorcycles above 350 cc, racing cars.

• Ultra-luxury assets: yachts and aircraft for personal use.

• Digital sin goods: online gambling and gaming platforms.

Effectively, this list is very close to what was earlier under the cess structure, now its better formalised into GST itself.

FAQs And Clarifications

The tax authorities have explained some of the finer points to avoid confusion in the form of common FAQs:

Why include ‘other non-alcoholic beverages’? To keep similar products under the same rate and prevent misclassification. For instance, a fruit-based fizzy drink should not escape higher tax simply because it is not named differently.

What about ordinary food preparations? Items not specified in the schedules will attract just 5 per cent.

What about Indian breads like parotta or roti? All Indian breads, by whatever name, have been exempted to remove earlier confusion where some types were taxed and others were not.

Why raise rates on carbonated fruit beverages? These already had Cess over GST. Since Cess has been removed, the higher 40 per cent GST ensures there is no revenue loss.

The Bigger Picture

The 56th GST Council meeting that finalised these changes has slimmed down the tax system to two broad slabs, 5 per cent and 18 per cent, plus the special 40 per cent rate for sin and luxury goods. Everyday products like soaps, shampoos, toothpaste, small appliances, and even medicines have moved to lower rates, while harmful or ultra-luxury items remain under the steepest category.

The government wants to keep taxes simple and consumer-friendly for most people, while keeping sin goods and super-luxuries firmly under a punitive tax regime.