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.
For eight years GST ran on four principal rates — 5%, 12%, 18% and 28% — plus compensation cess on top of the highest. Classification disputes were not really about tax policy; they were about which of four boxes a product fell into, and the gap between boxes was worth fighting over.
From 22 September 2025, there are two.
GST 2.0 collapses the schedule to 5% (merit) and 18% (standard), with a 40% demerit rate for a narrow list of sin and luxury goods. 12% and 28% are gone as general slabs. Notification No. 09/2025-Central Tax (Rate) carries the consolidated goods schedule; Notification No. 10/2025-Central Tax (Rate) dated 17.09.2025 aligns the "pre-packaged and labelled" Explanation to the Legal Metrology Act. Compensation cess is wound down. Special rates — 0.25% on rough diamonds, 3% on gold and silver — survive outside the two-rate frame.
What moved where
The redistribution was not mechanical. Broadly:
| Old rate | Where it went |
|---|---|
| 28% (non-sin) | mostly 18% — cement, air conditioners, televisions, dishwashers, small cars, motorcycles up to 350cc |
| 28% + cess (sin/luxury) | 40%, cess folded in — pan masala, tobacco, aerated drinks, large cars, luxury motorcycles |
| 18% (mass consumption) | many to 5% — toilet soap, shampoo, hair oil, toothpaste, bicycles, tableware |
| 12% | split — essentials down to 5%, the rest up to 18% |
| 5% | mostly held at 5% |
| Nil | largely held, with additions — individual life and health insurance, several food items |
The direction of travel is that the daily-use basket moved down and the demerit basket moved up and absorbed the cess. The 12% slab, which had always been the hardest to justify, disappeared by being split.
The 40% rate is not a fourth slab
It is easy to describe GST 2.0 as "5, 18 and 40" and treat all three as slabs. That misreads it.
5% and 18% are the general rates. Everything is one or the other unless it is specifically listed elsewhere. 40% is a closed, enumerated list — pan masala, gutkha, cigarettes and tobacco products, aerated and carbonated beverages, caffeinated and carbonated drinks, luxury motor vehicles above the specified engine and length thresholds, motorcycles above 350cc, yachts, aircraft for personal use, and specified betting, gambling and online money gaming.
Nothing gets to 40% by residual reasoning. If a product is not in the list, it is not at 40%, however premium it looks. What actually falls under the 40% rate →
Classification did not get easier everywhere
Fewer boxes should mean fewer fights. In one place it produced a sharper one.
The gap between 5% and 40% on beverages is thirty-five points. A fruit-pulp or fruit-juice-based drink that is not carbonated sits low; add carbonation and it becomes a carbonated beverage of fruit drink liable at 40%. The ICAI FMCG sectoral guide flags precisely this: the classification line between a fruit-based drink and a carbonated fruit drink now carries a tax consequence large enough to make it the sector's most contested question.
Similarly, "pre-packaged and labelled" determines whether staples like rice, pulses and flour are exempt or at 5%. Notification No. 10/2025-CT(Rate) amended the Explanation below the rate notifications so that the expression takes the meaning assigned under s.2(1) of the Legal Metrology Act, 2009. Rate liability on a food product therefore depends not only on what it is, but on whether the package satisfies Legal Metrology conditions. Pre-packaged and labelled after Notification 10/2025 →
The downstream effects nobody budgeted for
Inverted duty at scale. When an output moves from 18% to 5% but the inputs behind it — chemicals, packaging, machinery, job work, freight, advertising — stay at 18%, credit accumulates every month. The ICAI FMCG guide identifies accumulation of unutilised ITC as a direct consequence of rate rationalisation. ITC accumulation after the rate cuts →
Transitional stock. Goods manufactured and cleared at the old rate sit in distributor and retailer inventory. The credit in the chain was taken at the old rate; the onward supply happens at the new one. Rate change and time of supply under section 14 →
Labelling and MRP. A rate cut that is not passed through in the printed MRP is a legal metrology problem before it is a GST problem.
Contracts and quotes. Long-term supply contracts quoted "plus GST at applicable rates" repriced automatically. Contracts quoted at a GST-inclusive figure did not, and the margin moved to whichever side the drafting favoured.
What did not change
- The CGST/SGST/IGST split is untouched. A 5% intra-State supply is 2.5% + 2.5%.
- Section 9 and the charging framework are unchanged. This was done through rate notifications, not by amending the Act.
- Exempt supplies remain exempt supplies. A rate cut to 5% is not an exemption, and the ITC consequences are opposite.
- Special rates survive — 0.25% on rough diamonds, 3% on gold, silver and jewellery, and the composition rates in s.10.
- RCM lists, e-invoicing thresholds, return forms and due dates are unaffected.
Key takeaways
- Two principal rates, 5% and 18%, effective 22 September 2025.
- 40% is an enumerated demerit list, not a residual slab.
- 12% and 28% are gone as general rates.
- Notification 09/2025-CT(Rate) is the consolidated goods schedule.
- Notification 10/2025-CT(Rate) ties "pre-packaged and labelled" to the Legal Metrology Act.
- The structural consequence is inverted duty; the commercial consequence is contract repricing.
Read next
- What Actually Falls Under the 40% Demerit Rate
- Rate Change and Time of Supply Under Section 14
- ITC Accumulation After GST 2.0 Rate Cuts
- GST 2.0 Transition Checklist for Businesses
Disclaimer: Positions stated as on 5 September 2026, based on ICAI GST publications updated to 2026. Rate notifications are amended frequently — verify the current entry for your HSN on cbic.gov.in before pricing.