GST 2.0 Explained: New 5%, 18% and 40% Rates and What Changed

GST 2.0 is the rate rationalisation recommended by the GST Council at its 56th meeting on 3 September 2025 and in force from 22 September 2025. It replaced the old four-slab structure (5%, 12%, 18% and 28%) with two main rates, 5% and 18%, plus a special 40% rate for a short list of sin and luxury goods. Nil-rated and exempt items stay exempt.

For most businesses the practical question is simple: which rate applies to what you sell and buy now, and did anything you billed around 22 September 2025 get the wrong rate? This guide covers the new structure, the big category moves, the transition rules, and what to check in your books.

The GST 2.0 slabs at a glance

• 5% (merit rate) — most goods that were at 12%, plus many daily-use items that were at 18%. Split as 2.5% CGST and 2.5% SGST on intra-state supplies.
• 18% (standard rate) — most goods that were at 28%, and the bulk of services. Split as 9% CGST and 9% SGST.
• 40% (special rate) — a small group of sin and luxury goods and specified actionable claims such as betting, casinos, lotteries and online money gaming.
• Nil / exempt — unchanged in principle, with some additions such as UHT milk, Indian breads like roti and paratha, and individual life and health insurance policies.

The 12% and 28% slabs no longer exist for new supplies. The goods rate schedule is now Notification 9/2025-Central Tax (Rate), dated 17 September 2025, which superseded the 2017 schedule; the exempt-goods list moved to Notification 10/2025-Central Tax (Rate). Both have been amended since, so always look up your HSN code in the current consolidated version rather than an old rate chart.

What moved where: the changes most businesses notice

Goods that came down from 28% to 18%

• Air conditioners and dishwashers.
• All TVs and monitors, which are now uniformly 18% (larger screens used to be 28%).
• Small cars: petrol, LPG or CNG cars up to 1,200 cc and 4,000 mm long, and diesel cars up to 1,500 cc and 4,000 mm.
• Motorcycles up to and including 350 cc, three-wheelers, buses, trucks and ambulances.
• All batteries under heading 8507 (lithium-ion batteries were already at 18%).

Goods that came down to 5%

• Agricultural machinery such as sprinklers, drip irrigation systems and harvesting machinery (from 12%).
• Bicycles and their parts (from 12%).
• Drugs and medicines (other than those at nil) and medical devices used in medical, surgical, dental and veterinary work.
• Renewable energy devices that were at 12%.
• Daily-use personal care goods such as toilet soap bars, toothpaste, toothbrushes and dental floss.
• Spectacles and goggles for correcting vision.

Goods now at 40%

• Mid-size and large cars (above 1,500 cc or longer than 4,000 mm) and qualifying utility vehicles, at 40% with no compensation cess on top.
• Motorcycles above 350 cc.
• Carbonated and other non-alcoholic beverages that were previously taxed at 28% plus cess.

The Council's reasoning for the 40% rate is that most of these goods used to carry compensation cess on top of 28% GST. With the compensation cess being wound up, the cess was folded into the GST rate to keep the overall tax roughly where it was.

Services: the headline changes

• Hotel accommodation up to ₹7,500 per unit per day: 5% without input tax credit (ITC).
• Beauty and physical well-being services — salons, barbers, gyms, fitness centres, yoga: 5% without ITC (previously 18%).
• Goods transport agencies and passenger transport: 5% without ITC, with an option to charge 18% and take full ITC. Air travel has no such option: economy class is 5% and other classes are 18%.
• Job work: pharmaceutical and leather (Chapter 41) job work moved to 5% with ITC; residuary job work that was at 12% moved to 18%.
• Individual life and health insurance, including term, ULIP, endowment, family floater and senior citizen policies: exempt.

The tobacco exception and the end of compensation cess

Cigarettes, chewing tobacco products, unmanufactured tobacco and beedi did not move on 22 September 2025. Their old GST rates and compensation cess continued until the cess-related loans were repaid. The government later notified that compensation cess on tobacco and pan masala would end on 1 February 2026, replacing it with higher central excise duty on tobacco products and a new Health Security se National Security Cess on pan masala. If you deal in these goods, check the current rate and excise notifications for your exact HSN code; this is the one corner of GST 2.0 that changed twice.

Transition rules: which rate applies to a supply that straddled 22 September 2025

The government's FAQ on the 56th Council decisions points to section 14 of the CGST Act, which decides the time of supply, and so the rate, when a rate changes. It has six limbs depending on the order of supply, invoice and payment. The two the FAQ highlights cover goods or services supplied before the change but invoiced after it:

• If payment was received after the change, the time of supply is the earlier of the invoice date and the payment date.
• If payment was received before the change, the time of supply is the payment date.

Advances follow the same time-of-supply logic. Stock you held on 22 September 2025 attracts the new rate when you sell it, because GST is levied on supply. E-way bills already in transit did not need to be cancelled and regenerated.

Worked example: a Nagpur electronics retailer

Take a Nagpur electronics shop that sells split air conditioners at ₹40,000 before tax.

1. Old rate (28%): tax of ₹11,200, invoice total ₹51,200.
2. New rate (18%): tax of ₹7,200 (₹3,600 CGST + ₹3,600 SGST), invoice total ₹47,200. The tax on each unit falls by ₹4,000.
3. A straddling sale: a customer took delivery on 19 September 2025, the invoice was raised on 24 September and payment came on 25 September. Supply happened before the change, but both invoice and payment came after it. The time of supply is the earlier of the two, 24 September, so the new 18% rate applies.
4. A second customer paid in full on 20 September 2025 for an AC delivered on 23 September, with the invoice raised on 23 September. This time the supply itself happened after the change, so a different limb of section 14 applies: where the supply and invoice come after the change but payment came before it, the time of supply is the invoice date. The invoice is dated 23 September, so this sale is also taxed at 18%, even though the money arrived while 28% was still in force.
5. A third customer took delivery and paid on 18 September 2025, but the shop only raised the invoice on 22 September. Supply and payment both came before the change, and the invoice after it, so the time of supply is the payment date, 18 September. This sale stays at the old 28% rate.
6. Input tax credit: the shop holds ITC built up from purchases at 28%. The FAQ confirms that credit already in the electronic credit ledger can be used against any output liability, including at the lower rate. If the shop now carries more credit than it can use, that is accumulated credit, not a loss, but the FAQ also notes that refund of credit that piled up only because the same goods changed rate is not covered by the inverted-duty refund route.

The lesson from steps 3 to 5 is that three dates decide the rate: supply, invoice and payment. Pull out every transaction where those dates fall on both sides of 22 September 2025, apply the right limb of section 14 to each, and keep a note of the reasoning with the invoice. Anything that does not fit neatly, such as part-payments or continuous supplies, is worth a quick check with your CA.

What to check in your books now

• Item master: every HSN and SAC code should carry its post-22 September 2025 rate. A stale 12% or 28% on an item is the most common cause of a wrong invoice.
• Credit notes for old invoices: a credit note against an invoice issued before the change should carry the rate charged on the original invoice, not today's rate.
• Exempted outputs: if something you sell became exempt (for example individual insurance policies), the FAQ says ITC relating to supplies made on or after 22 September 2025 has to be reversed as the law requires.
• "5% without ITC" services: if you run a salon, gym or budget hotel, you can no longer claim ITC on inputs for those services. Budget for that cost.
• Purchase bills: check that suppliers billed you at the new rate. Overcharged GST on a purchase bill creates an ITC mismatch you will have to clean up later.
• Price lists and contracts: long-term contracts that quote "price plus applicable GST" adjust automatically; fixed GST-inclusive prices do not.

Common mistakes we see after GST 2.0

• Relying on a rate chart from a blog instead of the current notification for your exact HSN code. Rates now vary within the same broad category (for example, motorcycles at 18% or 40% depending on engine size).
• Assuming every service at 5% still allows ITC. Several 5% service rates are specifically "without ITC".
• Forgetting that the registration thresholds did not change. The Council's FAQ confirms there was no change to the goods registration threshold under GST 2.0.
• Treating tobacco products as if they moved on 22 September 2025. They followed a separate timeline.

hellobooks< / a > -helps-with-gst-20">How HelloBooks helps with GST 2.0

HelloBooks keeps HSN and SAC codes and their rates on the item master, so when a rate changes you update it once and every new invoice, credit note and bill picks it up. It calculates CGST, SGST and IGST on each line, prepares GSTR-1 and GSTR-3B from your transactions, and reconciles your purchase bills against GSTR-2A and 2B so overcharged or mismatched supplier tax shows up before you file. The compliance calendar reminds you of due dates. You or your CA still review the rates and the edge cases like the straddling sales above; the software does the arithmetic and the tracking.

This is general information as of November 2026, not tax or legal advice. Check the current CBIC rate notifications or a qualified CA for your situation.