GST 2.0 Explained: New 5% / 18% / 40% Slabs and What Got Cheaper
Last updated: 5 September 2026For eight years the standard complaint about India's GST was not the rate but the count. Four main slabs, two special ones, a compensation cess on top of the highest slab, and endless litigation over which bucket a product belonged in. A cream biscuit and a plain one could sit in different slabs. On 22 September 2025 most of that went away.
The 56th GST Council, meeting on 3 September 2025, withdrew the 12% and 28% slabs for almost everything and left a three-rung ladder: 0%, 5% and 18%, with a punitive 40% reserved for luxury and sin goods. Small special rates survive for precious metals. Nearly a year on, the shape of the change is clear, and so are the places where it did not work out the way the headlines suggested.
Why the Council finally did it
Three pressures converged. Classification disputes had become a running joke and a genuine compliance cost, with identical-looking products taxed differently because of a chapter note. The compensation cess, introduced in 2017 to make states whole for five years, had been extended to service the borrowings taken during the pandemic, and by 2025 that debt was close to repaid — which freed the 28%-plus-cess structure to be dismantled. And consumption had been soft; a broad, visible tax cut was the fastest available stimulus.
The design principle was straightforward: merit goods down, sin goods up, the middle collapsed. Most of the old 12% bucket fell to 5%. Most of the old 28% bucket fell to 18%. The 40% rate absorbed what used to be 28% plus a heavy cess, so in several cases a bigger-sounding number meant a smaller final price.
The new structure
| Rate | What it covers |
|---|---|
| 0% / exempt | Unprocessed food, UHT milk, pre-packaged paneer and chena, all Indian breads, 33 notified life-saving drugs, books and stationery, individual life and health insurance, education, most healthcare |
| 5% | Daily-use goods and merit items: soap, shampoo, toothpaste, hair oil, bicycles, packaged snacks, chocolates, coffee, ice cream, butter and ghee, most medicines, medical devices, tractors, apparel and footwear up to ₹2,500, plus restaurants, budget hotel rooms, salons and gyms (all without input tax credit) |
| 18% | The standard rate and the residual: cement, all televisions, air conditioners, appliances, small cars and bikes up to 350cc, commercial vehicles and auto parts, telecom, banking, professional and IT services, hotel rooms above ₹7,500 a night |
| 40% | De-merit and luxury: aerated and caffeinated sugary drinks, large cars and SUVs, bikes above 350cc, yachts and private aircraft, casinos, betting, online money gaming, and from February 2026 all tobacco products |
| 3% and 0.25% | Gold, silver, platinum and jewellery at 3%; rough diamonds at 0.25% |
What moved where
A representative sample of the shifts, with the direction of travel.
| Item | Old rate | New rate |
|---|---|---|
| UHT milk, pre-packaged paneer, Indian breads | 5% / 12% | Nil |
| Individual life and health insurance premiums | 18% | Exempt |
| Most medicines | 12% | 5% |
| Soap, shampoo, toothpaste, toothbrush | 18% | 5% |
| Namkeen, sauces, pasta, chocolates, coffee, ice cream | 12% / 18% | 5% |
| Bicycles, tableware, bamboo joinery | 12% | 5% |
| Air conditioners, dishwashers, televisions of all sizes | 28% | 18% |
| Cement | 28% | 18% |
| Small cars, bikes up to 350cc, three-wheelers, buses, trucks, auto parts | 28% + cess | 18% |
| Large cars and SUVs, bikes above 350cc | 28% + cess up to 22% | 40% |
| Aerated and sugary drinks | 28% + 12% cess | 40% |
| Salons, gyms, spas, yoga classes | 18% | 5% without ITC |
What it did to a household budget
The cuts are real but modest per item, and they add up mainly when a family buys something large. Assuming the seller passed the change on in full:
| Purchase | Pre-tax price | Price before 22 Sept 2025 | Price now | Saving |
|---|---|---|---|---|
| 1.5-tonne air conditioner | ₹40,000 | ₹51,200 | ₹47,200 | ₹4,000 |
| 55-inch television | ₹50,000 | ₹64,000 | ₹59,000 | ₹5,000 |
| Small petrol hatchback | ₹6,00,000 | ₹7,74,000 | ₹7,08,000 | ₹66,000 |
| Cement, 400 bags for a small house | ₹1,20,000 | ₹1,53,600 | ₹1,41,600 | ₹12,000 |
| Term insurance premium | ₹20,000 | ₹23,600 | ₹20,000 | ₹3,600 |
| Monthly grocery and toiletries basket | ₹8,000 | ₹8,900 | ₹8,450 | ₹450 |
The car line is the one that matters most in rupee terms, because a small petrol car previously carried 28% GST plus 1% compensation cess and now carries a flat 18%. The insurance line deserves a caveat: because the supply became exempt rather than zero-rated, insurers can no longer claim input tax credit on their own costs, and they have to reverse credit on inputs attributable to exempt output. Several insurers absorbed part of that, so premiums did not always fall by the full 18%.
What got more expensive
Less than the "40% slab" headline implied. For large cars and bikes above 350cc, the 40% replaced 28% plus a cess of up to 22%, so an SUV with a taxable value of ₹20,00,000 went from a ₹30,00,000 to a ₹28,00,000 on-road-before-registration figure. Those buyers gained.
The genuine losers were aerated and caffeinated sugary drinks, which moved from 28% plus a 12% cess to a flat 40% — broadly unchanged to slightly up — and services in the gambling and online money gaming space. Some small hotels also found the arithmetic unkind: rooms up to ₹7,500 a night sit at 5% without input tax credit, which is not optional, so GST paid on their linen, food supplies, electricity-adjacent inputs and renovation is now a straight cost rather than a credit. The same applies to salons and gyms that moved from 18% with credit to 5% without it. A capital-intensive gym that had been recovering credit on equipment lost that.
What small businesses had to do
The rate change was announced on 3 September 2025 and took effect on 22 September, which left nineteen days. If you run a business, this is the checklist that mattered, and it is worth keeping for the next revision.
- Update rate masters HSN by HSN. Not by product name and not in bulk. The single most common error in October 2025 returns was a billing system still applying 12% to an item that had moved to 5%.
- Apply the time of supply rules at the boundary. Section 14 of the CGST Act decides which rate applies when the supply, the invoice and the payment straddle a rate change. Two of the three events falling before 22 September generally keeps the old rate; two falling after generally applies the new one. Invoices dated on or before 21 September carry the old rate.
- Issue credit notes at the original rate. A customer returning goods sold at 28% in August gets a credit note at 28%, not at 18%. Getting this wrong creates a mismatch that surfaces in reconciliation months later.
- Deal with the input tax credit overhang. Businesses whose outputs fell to 5% while their inputs stayed at 18% ended up in an inverted duty structure with credit piling up. That credit is refundable under section 54(3) of the CGST Act, but you have to apply for it; it does not come back automatically. Businesses whose output became exempt, most obviously insurance intermediaries, had to reverse credit under rules 42 and 43 instead.
- Re-declare MRP on unsold stock. Legal Metrology rules allow a revised retail price to be declared on existing packages by sticker, stamping or online printing, with the original price still visible, supported by newspaper advertisements and a circular to dealers. Retailers who simply kept selling at the old MRP were the ones that drew complaints.
- Reprice deliberately, and tell customers. The government's clear expectation was that the cuts would reach consumers. Whether or not you are formally required to pass on every rupee, a visible price revision was the cheap and sensible response.
- Leave composition dealers alone. If you pay 1%, 5% or 6% of turnover under the composition scheme, none of this changed your rate. You do not charge GST on your bill of supply and you never claimed credit.
One durable lesson: businesses that had clean HSN-level masters got through in a weekend, and businesses that had been billing off free-text product descriptions spent a month cleaning up. That is an argument for tidying your item master before the next Council meeting, not after it.
The tobacco timetable
Tobacco was deliberately held back. Pan masala, gutkha, cigarettes and chewing tobacco stayed at 28% plus compensation cess through the transition, and moved to 40% GST from 1 February 2026, once the cess-linked borrowing obligations were settled. The 40% does not stand alone: an additional excise duty applies to cigarettes and other tobacco products, and pan masala also attracts a Health and National Security Cess. The net effect was designed to keep the total burden roughly where it was, not to cut it.
FAQ
- Are the 12% and 28% slabs completely gone?
- For practical purposes yes. They were withdrawn for almost all goods and services on 22 September 2025, with tobacco held at 28% until it moved to 40% in February 2026. You will still meet the old rates when reconciling pre-September-2025 invoices, credit notes and returns.
- Did the 40% slab make cars more expensive?
- No, for most buyers it made them cheaper. The 40% replaced 28% GST plus a compensation cess of up to 22%. An SUV with a ₹20 lakh taxable value now attracts ₹8 lakh of tax instead of ₹10 lakh.
- Is my health insurance premium really GST-free?
- Yes, for individual policies including term plans, ULIPs, family floaters and senior citizen plans. Group and employer-provided cover still attracts 18%. Because the supply is exempt rather than zero-rated, insurers lose credit on their inputs, so premiums did not always drop by the full 18%.
- Why is my gym or salon bill only slightly lower?
- Those services moved from 18% with input tax credit to 5% without it. The provider now bears GST on rent, equipment and supplies as a cost, and many rebuilt that into their pricing. The tax fell by 13 points; the price usually did not.
- What rate applies if I paid an advance before 22 September for goods delivered after?
- Section 14 of the CGST Act governs it. Look at when the supply happened, when the invoice was issued and when payment was received: whichever two of those three fall on the same side of 22 September determine the rate. Where the position is genuinely borderline, document your reasoning on the invoice.
- I have accumulated input tax credit because my output rate fell. Can I get it back?
- Yes, where the accumulation is caused by an inverted duty structure — inputs taxed higher than outputs — you can claim a refund under section 54(3) of the CGST Act. You must file the refund application; it is not credited automatically, and there are time limits.
- How do I check the current rate for a specific product?
- Use the CBIC rate finder at cbic-gst.gov.in or the Search HSN Code utility on gst.gov.in, and confirm against the rate notification rather than a press summary. Rates attach to HSN and SAC codes, not to product names.