GST 2.0 New Rates: The 5, 18 and 40 Percent Structure, One Year On

The 12% and 28% GST slabs no longer exist, and if your pricing, contracts or credit position still assumes they do, this is what changed on 22 September 2025 and what it is still costing businesses a year later.

Last verified: 5 September 2026 · Applies to: supplies made on or after 22 September 2025

Contents

• What the 56th Council actually did
• The four rates, in full
• Where the 12 and 28 percent items went
• The special rates that survived
• Tobacco: the second transition, on 1 February 2026
• Five things businesses still have wrong
• Illustrative example: cement across the cut-off
• Frequently asked questions
• How BVACA can help

What the 56th Council actually did

The GST Council met on 3 September 2025 and did the one thing it had avoided since 2017: it deleted two of the four rate slabs. The 12% slab and the 28% slab were both abolished. Everything that sat in them was moved either down, to 5% or Nil, or up, to 18% or a new 40% de-merit rate.

The change took effect on 22 September 2025, given effect by Notifications 9/2025 to 17/2025-Central Tax (Rate), all dated 17 September 2025.

Note the gap. Five days between the notifications and the effective date. That interval is the source of most of the problems businesses are still unwinding a year later: contracts quoted at old rates, price lists reprinted late, purchase orders raised on one side of the line and invoiced on the other.

The reform is commonly called GST 2.0. It is not a new law. The Act, the returns, the credit rules and the registration thresholds all stayed where they were. What moved was the rate schedule, and the rate schedule is what your ERP, your contracts and your working capital are wired to.

The four rates, in full

Two structural points are worth pausing on.

First, individual life and health insurance moved to Nil, including reinsurance. That is a rate cut for the policyholder and a credit problem for the insurer, because output at Nil does not carry input credit with it in the ordinary way.

Second, cement at 18% is the single change with the widest downstream reach. Cement is an input to almost every construction contract in the country, and construction contracts are typically long, fixed-price and written before September 2025.

Where the 12 and 28 percent items went

This is the part clients get wrong most often, because people remember that "GST came down" and stop there.

• The 12% slab went mostly down, to 5%. That covers a very large share of everyday goods and most of the medicine and medical-device basket.
• Some ex-12% items went to Nil outright: exercise books, notebooks, maps, erasers, sharpeners.
• The 28% slab went mostly down too, to 18%. White goods, cement, small cars, motorcycles up to 350cc and commercial vehicles all landed at 18%.
• But a defined set went up, into the new 40% de-merit rate: tobacco in all forms, sugar-sweetened carbonated drinks, motorcycles above 350cc, luxury cars, yachts, personal-use aircraft, casinos and betting.

So "12% and 28% were abolished" is not the same statement as "GST fell". For a business selling large motorcycles or carbonated soft drinks, the effective burden went the other way, into the new 40% de-merit rate. Tobacco was the exception to the 22 September 2025 switch and transitioned separately on 1 February 2026, which is dealt with below.

If you sell across a mixed basket, the only safe approach is line-by-line. A category-level assumption will be wrong for part of your catalogue.

The special rates that survived

The reform did not touch two long-standing special rates:

• 3% on gold, silver and jewellery
• 0.25% on rough diamonds

Jewellers in particular sometimes assume a four-rate structure means their 3% went away. It did not.

Tobacco: the second transition, on 1 February 2026

Tobacco was carved out of the 22 September 2025 switch. It was held at pre-reform rates until the outstanding compensation cess obligations had been discharged, and it transitioned separately on 1 February 2026.

What happened on that date:

• Compensation cess ended.
• 40% GST applies to tobacco products, with biris at 18%.
• The cess was replaced by an additional excise duty on tobacco and a Health and National Security Cess on pan masala.

The additional excise duty on tobacco and the Health and National Security Cess on pan masala were legislated by the Finance Act, 2026 with effect from 1 February 2026, timed with the tobacco cess transition.

For anyone in that trade the practical consequence is that a levy which was creditable in the GST chain has been partly replaced by levies that sit outside it. That is a pricing and margin question, not just a compliance one, and it needs to be modelled rather than assumed.

Five things businesses still have wrong

1. Contracts were repriced late, or not at all

A fixed-price contract signed in, say, June 2025 at a GST-inclusive number does not automatically pass the benefit of a rate cut to the customer, and a contract signed inclusive of 28% does not automatically absorb a move to 40%. What governs is the change-in-law clause, and most Indian commercial contracts have one that is either silent on indirect tax or drafted so loosely that both sides can read it their way.

Look at three things in each live contract: whether the price is stated exclusive or inclusive of GST; whether the change-in-law clause covers a change in rate as opposed to a change in law; and whether there is a mechanism and a time limit for claiming the adjustment. Where the clause is silent, the commercial outcome usually follows whoever raised the point first and in writing.

2. MRP restickering was treated as optional

Pre-printed retail packaging carried the old MRP. Where a rate fell, the revised MRP had to be brought to the consumer's attention, and where it rose, the declared price had to be corrected. Retailers who left old stock on shelves under old MRPs created a mismatch between the price charged and the price declared.

The Legal Metrology Department allowed revised MRP stickers on pre-printed packaging from 22 September 2025, with the relaxation window running to 31 December 2025. After that date the declaration had to be on the pack itself, not a sticker.

3. Invoices straddling the cut-off were issued on the wrong rate

Where the supply, the invoice and the payment fall on different sides of 22 September 2025, the applicable rate is decided by the time-of-supply rule for a rate change, not by the invoice date alone. Businesses that simply switched their ERP tax master on the morning of 22 September, and did nothing about goods dispatched on 20 September and invoiced on 23 September, have a population of incorrectly rated invoices sitting in their books.

These surface at reconciliation, because the recipient's credit will not match the supplier's outward declaration. If you are cleaning this up now, do it before the annual return rather than in it. Our guide to GSTR-9 and GSTR-9C covers where these differences have to be disclosed.

Time of supply for a rate change sits in CGST s.14. The mechanics: whichever two of (supply, invoice, payment) happen on the same side of the rate-change date determine the rate. So goods dispatched on 20 September and invoiced + paid on 23 September attract the new rate; goods dispatched + invoiced on 20 September but paid on 23 September attract the old rate. That is the test to apply invoice-by-invoice during the straddle period, and it is why an ERP that only looks at invoice date gets it wrong.

4. Inverted duty structures were created as well as cured

A rate cut on output without a matching cut on inputs creates an inverted duty structure: credit accumulates because output tax is persistently lower than input tax. The reform cured this for some sectors, where a 12% input and a 12% output both fell to 5%. It created it for others, most obviously where output moved to Nil or to 5% while the main inputs and input services stayed at 18%.

The consequence is a cash-flow one. Accumulated credit is not lost, but it is not usable either, and recovering it means a refund claim with its own documentation and timelines rather than a set-off in the next 3B.

Businesses that moved into inversion in September 2025 and did not start claiming until much later have simply funded the government for a year. If your credit ledger balance has been climbing steadily since late 2025 and your sales are not growing at the same rate, that is the diagnosis.

The refund route for accumulated ITC under an inverted duty structure is CGST s.54(3) read with Rule 89(5), on Form GST RFD-01. Refunds are limited to the ITC accumulated on inputs (not input services or capital goods) proportionate to the inverted turnover.

5. Stock held on the transition date was not analysed

Stock in hand on 22 September 2025 had been bought at old rates and was sold at new ones. Where the output rate merely fell from 28% to 18%, the credit already taken on that stock stays intact and the only issue is margin. Where the output rate moved to Nil, the position is different, because credit attributable to an exempt output is not ordinarily retained.

Where the output rate on stock in hand on 22 September 2025 fell to Nil, ITC on that stock had to be reversed under CGST s.17(2) read with Rule 42 (or Rule 43 for capital goods), computed on the value of stock held on the transition date. Businesses that simply flipped their tax master without a stock-position reversal now carry a demand exposure that surfaces at the annual reconciliation.

Illustrative example: cement across the cut-off

Illustrative example. A Panchkula contractor holds a fixed-price civil contract of ₹5 crore, quoted in July 2025 and stated as "plus applicable GST". Cement is roughly 20% of the contract value, that is ₹1 crore of cement purchases, and the contractor bought ₹40 lakh of cement in August 2025 at the pre-reform rate, holding it on site on 22 September 2025.

• On the output side, nothing changes for the contractor's own works contract rate in this example, and the price is exclusive of GST, so the customer bears the tax either way.
• On the input side, cement bought from 22 September 2025 onward carries 18% rather than the earlier higher rate, so the remaining ₹60 lakh of cement purchases carry less tax. The tax is creditable, so this is not a margin gain, but it is a working-capital gain of the difference in rate for the period between paying the supplier and offsetting the credit.
• On the stock held, the credit taken at the old rate is unaffected. The contractor's cost of that ₹40 lakh of cement is unchanged.
• Where this contractor loses is if the contract had been quoted inclusive of GST at pre-reform rates on the output side and the customer now demands the benefit of a rate reduction. That argument is won or lost on the change-in-law clause, not on the notification.

The figures above are illustrative and rounded. They are not a client matter.

Frequently asked questions

What are the new GST rates after GST 2.0?

There are four: Nil, 5%, 18% and 40%. The 12% and 28% slabs were abolished with effect from 22 September 2025 by Notifications 9/2025 to 17/2025-Central Tax (Rate) dated 17 September 2025. Two special rates continue outside this structure: 3% on gold, silver and jewellery, and 0.25% on rough diamonds.

Is the 12% GST slab really abolished?

Yes. It no longer exists. Most goods that were at 12% moved down to 5%, and a small set, including exercise books, notebooks, maps, erasers and sharpeners, moved to Nil. Any rate master, price list or contract that still carries a 12% line for supplies made on or after 22 September 2025 is wrong.

What is the GST rate on cement now?

Cement is at 18%. It moved from the abolished 28% slab into the standard 18% slab on 22 September 2025. Because cement is an input to most construction work, this is the single change with the broadest effect on project costing and on change-in-law claims under existing fixed-price contracts.

Did GST on tobacco change on 22 September 2025?

No. Tobacco was held at pre-reform rates until the compensation cess obligations were discharged, and transitioned separately on 1 February 2026. From that date compensation cess ended, 40% GST applies with biris at 18%, and an additional excise duty on tobacco plus a Health and National Security Cess on pan masala took the cess's place.

Do I have to reverse input tax credit because of the rate change?

Not merely because a rate fell. Where an output rate moved from 28% to 18%, credit already taken is unaffected. The question is live only where an output became exempt or Nil-rated, because credit attributable to an exempt output is not ordinarily retained. That analysis has to be done stock line by stock line.

Can I still claim a refund of credit that piled up because of inversion?

Accumulated credit from an inverted duty structure is recoverable by refund claim, not by set-off. It is not automatic and it is not indefinite: the claim has its own documentation and time limits. If your electronic credit ledger has been climbing since late 2025 without matching sales growth, start the claim rather than waiting for the balance to work itself off.

How BVACA can help

We work through the rate change the way it actually bites: contract by contract and SKU by SKU, not category by category. That means mapping your item master against the post-22-September-2025 schedule, identifying invoices issued on the wrong side of the cut-off, testing whether your change-in-law clauses actually reach a rate change, and quantifying whether the reform pushed you into or out of an inverted duty structure. Where inversion exists, we prepare and file the refund claim rather than letting the credit ledger absorb it. Our GST advisory and compliance support sits alongside broader tax consultancy for firms in Panchkula, Chandigarh, Mohali, Zirakpur and across the Tricity, and we work remotely for clients elsewhere in India.

If the rate change is not your only open GST item, two adjacent pieces are worth reading: the three-year bar on filing old GST returns, which is absolute and has no condonation route, and the new monthly GST workflow after IMS and 3B hard-locking.

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Author box: CA Vijender Singh Bachhal, Managing Partner, Bachhal Vijender & Associates (FRN 028355N), Panchkula. About the firm

Disclaimer: This article is general information current as at 5 September 2026, not advice for a specific situation. Tax and corporate law in India changed materially on 1 April 2026; verify the position before acting. Illustrative examples are not client matters.