The GST Council, on 3 September 2025, approved the most significant overhaul of GST rates since the regime began in 2017. The reform, popularly called “GST 2.0”, collapsed the four-slab structure of 5%, 12%, 18% and 28% into a simplified two-tier structure of 5% (merit) and 18% (standard), with a new 40% slab for select luxury and sin goods. The new rates took effect from 22 September 2025.
This is a practitioner’s read on what moved, what didn’t, and what to update in your invoicing and ERP.
The new rate structure
- 5% — merit rate. Essentials, food, common-use items, labour-intensive sectors. Approximately 99% of items previously at 12% have moved here.
- 18% — standard rate. Most goods and services. Approximately 90% of items previously at 28% have moved here.
- 40% — new slab for luxury and sin goods. The remaining ~10% from the old 28% slab moved up here.
- 0% — nil-rated and exempt goods continue.
- A few niche rates — 0.25% (rough diamonds), 3% (gold and silver) — continue.
Effectively, the merit/standard distinction now mirrors the kind of two-rate structures that operate in many other VAT/GST jurisdictions globally. Over 375 items saw rate reductions in the package.
What moved up — the 40% slab
The new 40% slab covers items the Council classified as luxury or sin: high-end automobiles, certain tobacco products, aerated sugary drinks, online gaming and similar. If your business sells anything previously at 28% that wasn’t a daily-use white good or building material, check the rate notification — you may be in the new 40% bucket. Most consumer durables (refrigerators, ACs, washing machines) moved down to 18%.
What moved down — the consumer windfall
Most consumer goods and services that were at 12% or 28% saw rate reductions. Common examples: many packaged foods and dairy items moved from 12% to 5%; consumer durables and a wide range of electronics moved from 28% to 18%; small cars (sub-1200cc petrol, sub-1500cc diesel) moved from 28% to 18%. The Council framed the package as a relief for the common consumer and a stimulus for labour-intensive manufacturing.
What changed in the invoicing — the dual-rate cliff
Invoices issued before 22 September 2025 use the old rates. Invoices issued on or after 22 September 2025 use the new rates. The cut-over is by date of invoice (or earliest of invoice / payment under the time-of-supply rules). Common edge-cases we saw in October-November 2025 returns:
- Continuous supplies (rental, subscription, AMC) — the rate applicable depends on whether the invoice was raised before or after 22 September. For monthly billing cycles spanning the change date, the September invoice could go either way depending on when it was raised.
- Advance receipts taken before 22 September against invoices raised after — the old rate applies on the advance, the new rate on the balance. Practical reconciliation pain in the next return.
- Pending credit notes against pre-22-September invoices — use the old rate that was on the original invoice.
- HSN reclassification under the new structure — some items that were previously straightforward now sit on the boundary between merit and standard. Get a written classification opinion if in doubt.
Input tax credit considerations
For most businesses, the move from 12%/18% to 18% on inputs and from 28% to 18% on finished goods has been net-neutral on margins because the credit chain absorbs the rate change. The taxpayers who saw cash-flow impact were:
- Sectors with inverted duty structure (where output rate was lower than input rate) — many such inversions narrowed or eliminated under GST 2.0, reducing inverted-refund claims for FY 2025-26 onwards.
- Composition dealers — rate slabs and turnover thresholds were revisited; check the Council notification for your specific category.
- Services in transition — particularly contracts spanning the change date; reconcile output liability and ITC claimed for September-October 2025 carefully.
What we recommend
- Reconcile your September-November 2025 GSTR-3B and GSTR-1 for the rate-cut transition. The post-22-September supplies need new HSN-rate combinations; some early returns we saw used old rates by mistake.
- Update your ERP and POS systems with the new rate cards. Most major vendors released updates by mid-September 2025; if you didn’t apply yours, do it now.
- Reprint your rate cards / menu — restaurants, retail and service providers should make sure customer-facing pricing reflects the new rates so you’re not collecting the old higher rate inadvertently.
- Re-look at AMC and subscription contracts that were priced at 28% — the new 18% may give your customer a price cut argument unless your contract has a tax pass-through clause.
- Check whether your inverted refund claim model still works — for many businesses, the inverted situation has narrowed or reversed.
If you’d like a sector-specific rate-impact note for your business, write to us at [email protected].
Sources
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