GST 2 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Most businesses handled the first week of the rate change well — the ERP was updated, invoices went out at the new rate, and nothing broke. The problems that surface a year later are different: a credit balance nobody claimed, a contract nobody repriced, a disclosure that does not reconcile in the annual return.
This is the close-out list. If you are preparing FY 2025-26 annual returns, it is also your review programme.
Twelve items: rate masters, HSN mapping, open orders, section 14 straddle transactions, stock and pricing, MRP and labelling, contracts, credit accumulation, cess balances, e-invoice and e-way bill masters, annual return disclosure, and the audit trail for every rate decision you took.
1. Rate masters, per SKU
Not a blanket update. Every item that moved needs its own entry, with the effective date recorded so that a credit note or amendment for a pre-change supply still picks up the old rate. An ERP that overwrote the rate rather than date-versioning it will misprice every retrospective document.
2. HSN mapping
The rate entry attaches to the HSN, not the product name. Where a rate depends on a condition — "pre-packaged and labelled", a size or engine threshold, a fruit content — the master needs to capture the condition, not only the code. Pre-packaged and labelled after Notification 10/2025 →
3. Open orders and advances
Any order taken before 22 September 2025 and executed after it is a section 14 question. Advances received at the old rate against supplies made at the new one need the differential resolved, and the customer told. Section 14 and the two-of-three test →
4. Straddle transactions, reconstructed
For the September 2025 period specifically, list every transaction where supply, invoice and payment did not all fall on the same side of the 22nd. Apply s.14 to each. Remember the four-working-day proviso — for payments credited after 26 September 2025, only the bank credit date counts.
5. Stock in hand and pricing
Stock is not re-rated and credit already availed on it is not disturbed. What changes is the onward selling price. A distributor holding inventory bought at 28% and selling at 18% is not entitled to a refund of the difference, but is exposed on margin if the market price fell with the rate.
6. MRP and labelling
A rate cut that is not reflected in the printed MRP is a Legal Metrology exposure. The usual route is a revised MRP sticker alongside the original declaration, within the permitted window. Retail stock in the trade channel needs the same treatment.
7. Contracts
Sort by pricing convention. Exclusive contracts repriced themselves; inclusive ones did not, and the benefit sits with the supplier unless something says otherwise. Check change-in-law notice periods you may have missed. Who keeps the rate cut? →
8. Credit accumulation and the refund claim
If your output moved to 5% and your inputs stayed at 18%, credit has been building every month since. Refund is claimed period by period under s.54(3) clause (ii), and the two-year limit runs from the due date of the s.39 return for each period. Start with the oldest. ITC accumulation after the rate cuts →
9. Compensation cess balances
Cess credit can only ever be used against cess, and the 40% demerit rate absorbed the cess. Test whether any part of the balance is attributable to zero-rated supplies and therefore refundable under Rule 89(4); document the rest before writing it off. Compensation cess wind-down →
10. E-invoice and e-way bill masters
Both draw rates from their own masters. An e-invoice generated at the wrong rate produces an IRN that cannot be corrected — it can only be cancelled within 24 hours, and after that the fix is a credit note. Check that the e-way bill portal's item master matches the invoicing master.
11. Annual return disclosure
In GSTR-9, outward supplies are reported rate-wise in Table 4 and Table 5. A year containing a rate change produces two rate rows for the same product, and the total has to tie to the books. In GSTR-9C, the reconciliation of taxable turnover and of tax paid will show the effect; unexplained variances here are the single most common trigger for a scrutiny notice.
12. The audit trail
For every rate decision that was not obvious — a classification call near a 5%/40% line, a pre-packaged determination, an inclusive-contract treatment — keep the contemporaneous note. Three years later, the reasoning is the defence; the conclusion on its own is not.
The quick self-test
| Question | If no |
|---|---|
| Are rate masters date-versioned? | Retrospective documents will misprice |
| Did every straddle transaction get a section 14 call? | Short payment with interest under s.50 |
| Have you filed inverted-duty refunds period by period? | Oldest periods will time-bar |
| Is the cess balance analysed? | Stranded credit written off without support |
| Do Table 4/5 of GSTR-9 tie to the books? | Scrutiny notice under ASMT-10 |
| Is there a note behind every borderline classification? | No defence at adjudication |
Key takeaways
- Rate masters must be date-versioned, not overwritten.
- Section 14 governs every transaction that straddled 22 September 2025.
- Stock is not re-rated, and credit already taken is not disturbed.
- Inverted-duty refunds run period by period — the two-year clock is already running.
- Cess credit has only one exit: zero-rated refund under Rule 89(4).
- GSTR-9 and 9C will show the rate change; make sure it reconciles.
Read next
- GST 2.0: The Two-Rate Structure Explained
- Section 14: Which Rate Applies Across a Rate Change
- ITC Accumulation After GST 2.0 Rate Cuts
- Who Keeps the Rate Cut? GST 2.0 and Your Contracts
Disclaimer: Positions stated as on 5 September 2026, based on ICAI GST publications updated to 2026. This is a general close-out list, not a substitute for a review of your own facts.