Currently, GST is applied in four slabs - 5%, 12%, 18% and 28%. Plus, there is a cess levied on luxury items and so-called sin goods like tobacco and caffeinated beverages. The plan approved on Thursday envisages scrapping the 12% and 18% slabs. This will involve shifting most items in the 12% slab to 5%, and most of the products in the 28% slab including some automobiles to 18%.

Insulin, condensed milk, preserved fish and vegetables, granite and marble, tableware and kitchenware and certain pharmaceutical products are among the products that will move from 12% to 5%.

Sin goods and 'super luxury vehicles' may be part of a new 40% slab. Top-end SUVs could still benefit from lower tax burden, since the cess applicable on the 28% slab will come to an end. However, discussions are on for a new duty on sin goods like tobacco, which are also expected to move from the 28% slab plus cess at present to the proposed 40% slab without the cess, so that the tax incidence on them remains the same after the tax rate recast.

The new system is a step towards a simpler mode in India's eight-year-old GST regime, originally conceived as a single uniform tax across the country, but later turned into a thicket of multiple rates and a cess on top of some of the products on the highest slab, 28%.

The Confederation of Indian Industry (CII) applauded the decision.

"This will certainly reduce classification complexity and improve ease of doing business. Besides, this would streamline the overall GST rate structure and help make industry all the more competitive. The common man would benefit the most, with reduced prices," said director-general Chandrajit Banerjee said.

The state ministers briefed the media after Thursday's meeting, expressing their support for the new regime.

"The group of ministers discussed the central government's proposal to drop the 12% and 28% slabs (for a two-rate structure) and has endorsed it. The recommendations will be placed before the GST Council," said Samrat Chaudhary, Bihar deputy chief minister who is also convenor of the group.

West Bengal finance minister Chandrima Bhattacharya said the group endorsed the Centre's proposals and that nobody would oppose consumer-friendly measures. She said her state has proposed that tobacco and its preparations which currently attract a GST compensation cess in addition to 28% GST, should be levied a new duty so that the tax incidence on them remains unchanged even after the cess expires later this year.

Uttar Pradesh finance minister Suresh Kumar Khanna said that every member of the ministerial group welcomed the Centre's proposals. Besides the convenor, the panel has five members, which also include Kerala finance minister K.N. Balagopal, Karnataka revenue minister Krishna Byre Gowda and Rajasthan health minister Gajendra Singh.

"GST rate rationalization is in the interest of the common man. It will give relief to them," said Khanna. When pro-people measures are taken, there will be some impact on revenue, but given the benefit to the people, everyone endorsed it", Khanna added. The GST Council will decide on the ministerial group's recommendations, he said.

"We have no issues in accepting pro-people measures. However, the extent of revenue loss due to these measures has not been quantified in the proposals. We have to also think about how to make up for the revenue loss," said Bhattacharya. The minister said that when the group of ministers presents its report to the Council, a note on this will be included.

Experts said the decision is likely to boost demand and consumption.

"The move to cut GST slabs from four to just two is a big step towards simplification. For consumers, this means that many everyday goods and services that were earlier taxed at 12% may now come down to 5%, directly reducing prices. Similarly, items that attracted 28% GST could soon be available at 18%, which will make products like appliances, electronics and even cars more affordable," said Sandeep Sehgal, partner-tax at AKM Global, a tax and consulting firm.

For businesses, a simpler structure means fewer disputes and easier compliance, Sehgal said. "While sin goods and super luxury cars will fall under a higher 40% rate, the removal of the additional cess will still ease the overall burden on luxury vehicles. Overall, this reform is expected to increase demand, boost sales in key sectors like fast-moving consumer goods, consumer durables and automobiles and give the economy a positive push just before the festive season," said Sehgal.

Minister Bhattacharya explained that the GST compensation cess levied on certain products in the 28% slab will have to be discontinued as it cannot be levied beyond a period. Therefore, to ensure that the tax incidence on products like tobacco, which are on this slab and also currently attract compensation cess at various rates, remain unchanged after the tax rate restructure, a new duty has to be introduced on them in place of the cess. This could be done by amending the GST law, Bhattacharya explained in response to a query.

Bhattacharya said that one has to ensure that while the health and life insurance premiums are freed of GST, companies do pass on that benefit to the consumer. "One has to ensure that insurance companies do not enhance premiums or behave in any way that deny the benefit of tax relief to the ultimate consumer. It is the duty of the central government to ensure that," the minister said. Bhattacharya is also a member of another ministerial group that on Wednesday accepted a central government proposal to spare free health and life insurance premiums from 18% GST.

Another expert said the government should also make the necessary changes to correct the problem of finished products attracting lower or no tax, while inputs bear a higher tax outgo. This anomaly, referred to as inverted tax structure, affects the appeal of certain segments of the industry for potential investments and has been a priority for the policymakers to resolve.

"Industry does look forward to addressing duty inversion refund process comprehensively too and this has been identified by the finance ministry as a key structural issue," said Mahesh Jaising, partner and leader, indirect tax, Deloitte India.