The GST 2.0 Two-Slab Rate Structure for Small Businesses

For years, Indian shop owners and founders struggled to remember which rate applied to which product. Was that biscuit 5% or 12%? Was that TV 18% or 28%? GST 2.0 ended most of the guesswork.

The 56th GST Council, in September 2025, collapsed the four-rate system into a cleaner two-slab structure. The changes took effect from September 22, 2025, and have now run for two quarters. If your business is still using old rates on invoices, this guide walks through what the current structure looks like and where the common products landed.

The Old Structure vs the New

Tax Rate Chart

GST 2.0 Rate Structure (Effective September 22, 2025)

The new simplified slab system : 12% and 28% slabs removed for most items

Exempt : Unbranded food, fresh milk, books, healthcare

No GST applicable

0%

Daily essentials, agri equipment, packaged foods, footwear

Covers items moved down from 12%

5%

Default slab : Electronics, appliances, most services

Most 28% consumer goods moved here

18%

Sin goods : Pan masala, tobacco, aerated drinks, luxury vehicles

Tobacco and pan masala moved to 40% on 1 February 2026

40%

Gold, silver, and precious metals

Special rate retained; 1.5% CGST + 1.5% SGST

3%

Source: 56th GST Council, September 2025; CBIC rate notifications effective September 22, 2025

Until September 2025, GST had four main slabs: 5%, 12%, 18%, and 28%. A handful of items sat at 0%, and special items such as gold were at 3%. The 12% slab was the most confusing, holding a mixed bag of goods that did not obviously belong there, and the 28% slab often felt punitive for items people considered everyday essentials.

GST 2.0 reduced this to:

The 12% and 28% slabs are gone for almost every mainstream product.

Where Common Products Landed

Dropped from 12% or 18% to 5%

Several everyday items became cheaper overnight:

• Butter, ghee and cheese (packaged paneer went further, from 5% to nil)
• Packaged biscuits, chocolates, pasta, namkeen, and most snacks
• Hair oil, toilet soap bars, shampoo, toothpaste and toothbrushes (from 18%)
• Most agricultural equipment (harvesters, threshers, sprayers)
• Bicycles and bicycle parts
• Footwear priced up to Rs 2,500 per pair

Pencils, sharpeners, crayons, exercise books and notebooks went from 12% to nil. Pens stay at 18%.

Dropped from 28% to 18%

The 28% slab was the most politically charged. Most items on it moved to 18%, including:

• Small cars and motorcycles up to 350 cc
• Air conditioners, dishwashers, and televisions above 32 inches (all TVs are now 18%)
• Cement (a long-standing construction industry demand)
• Auto parts and accessories

Refrigerators, washing machines, LED lamps and most furniture were already at 18% before GST 2.0 and stay there.

New 40% Slab: Small but Steep

A new 40% slab was created for a narrow set of items the Council wanted to tax more heavily:

• Aerated and sweetened drinks and caffeinated beverages
• Larger cars (above the small-car engine and 4,000 mm length limits) and motorcycles above 350 cc
• Pan masala, cigarettes, chewing tobacco and similar products, from 1 February 2026 (they stayed at 28% plus compensation cess until then; biris are at 18%)

If you are not in these categories, you will never see 40% on your invoice.

Services: Mostly 18%, Some 5%, Some 0%

Services largely continue at 18% as the default. Exceptions that moved or were clarified:

• Beauty, salon, gym, fitness and yoga services moved from 18% with ITC to 5% without ITC
• Hotel rooms priced up to Rs 7,500 per night moved from 12% to 5% without ITC
• Individual life and health insurance premiums became exempt
• Healthcare by clinical establishments and education by recognised institutions remain exempt
• Restaurants continue at 5% without ITC (AC or non-AC) outside specified premises, or 18% with ITC within specified hotel premises

Gold and Precious Metals: The 3% Rate Stays

Gold jewellery, gold bars, silver, and platinum continue to be taxed at 3%. In IGST terms this is 3%; within a state, it is 1.5% CGST plus 1.5% SGST. The Council retained this special rate rather than collapsing it into the main slabs, largely because of the scale of the jewellery trade and the potential inflation impact on a single-slab move.

What This Means for Invoicing

If you sell across categories, your invoicing system needs to be updated in three places:

1. Item master. Each product's HSN code and tax rate must match the new structure. If you migrated from a 12% or 28% rate, confirm the new slab per the CBIC notification for your specific HSN.
2. Accounting software settings. Tally, Zoho Books, Busy, and ClearTax all pushed updates for GST 2.0. Ensure you ran the update and reviewed rate changes on your SKUs.
3. Templates and point-of-sale systems. Any hard-coded rate in a receipt template, a Razorpay checkout, or a quick-commerce seller dashboard must be refreshed.

Retail and FMCG owners should also audit price tags. Section 171 of the CGST Act requires the benefit of a rate reduction to be passed on to the buyer through a commensurate reduction in price.

How This Changes Your Monthly Return Filing

The mechanics of GSTR-1 and GSTR-3B have not changed. You continue to report outward supplies rate-wise, and GSTR-2B populates based on vendor invoices. What changes is the accuracy of the rate you pick. A wrong rate on a tax invoice will show up as a mismatch in IMS (Invoice Management System) for your customer, and your customer can reject the invoice.

For a typical SME, the pragmatic checklist each month is:

• Reconcile GSTR-2B vs purchase register for rate differences
• Reconcile GSTR-1 vs sales register for rate corrections
• Respond to IMS actions (accept, reject, pending) within the filing cycle
• File GSTR-3B using the validated numbers

If any invoice was issued at an old rate after September 22, 2025, correct it through a revised invoice or credit note before the annual reconciliation window closes.

Worked Example: A Small Kirana Store

Consider a neighbourhood kirana store that stocks basics, branded snacks, personal care products, and cold drinks. Monthly sales: Rs 5 lakh.

• Rice, atta, unbranded pulses (30% of sales, Rs 1.5L): 0% (exempt)
• Packaged biscuits and chocolates (20% of sales, Rs 1L): 5% (earlier 18%), tax fell by Rs 13,000/month
• Soaps, shampoos, toothpaste (15% of sales, Rs 75K): 5% (earlier 18%), tax fell by Rs 9,750/month
• Aerated cold drinks (10% of sales, Rs 50K): 40% GST (earlier 28% GST + 12% compensation cess, also 40% in total), no change
• Fruit juice based drinks (15% of sales, Rs 75K): 5% (earlier 12%), tax fell by Rs 5,250/month
• LED bulbs, lamps (10% of sales, Rs 50K): 18% (unchanged), no change

Net monthly impact: Tax fell by Rs 28,000/month for the store (Rs 13,000 + Rs 9,750 + Rs 5,250). Passing the savings on through lower prices keeps the store competitive.

Common Mistakes in the Transition

Four mistakes come up again and again:

1. Invoices issued at old rates. Accounting software not updated in time, leading to mismatches in buyer's GSTR-2B.
2. Treating the 40% slab as 28% + cess. Compensation cess was removed for cars, aerated drinks and most other goods from 22 September 2025, and for tobacco and pan masala from 1 February 2026. The 40% GST rate is now charged without compensation cess. Note that from 1 February 2026 tobacco products also carry a separate excise duty and pan masala a separate Health and National Security Cess, both outside GST.
3. Overlooking rate changes on services. Service businesses assumed nothing changed, but salons, gyms, hotels, insurance and several transport services shifted.
4. Ignoring anti-profiteering scrutiny. Rate reductions are expected to be passed on to the consumer. Businesses that kept prices unchanged after a rate drop can face notices.

What to Do if You Are Still Catching Up

If your business is still invoicing at pre-September 2025 rates, here is the practical sequence:

1. Pull a list of products and services you sell and confirm each HSN against the current rate notification.
2. Update your accounting software's tax master.
3. Audit invoices issued since September 22, 2025 and reconcile against the correct rate.
4. Issue credit notes or revised invoices where the rate was wrong.
5. Refile GSTR-1 amendments if the value or rate was incorrectly reported.

For most small businesses, this is a one-day exercise. For businesses with a large SKU catalogue (retail, e-commerce, FMCG), it takes longer and is worth handing to a compliance team.

The Bigger Shift

GST 2.0 is not just a rate adjustment. It is a signal that the tax system is moving towards fewer, simpler decisions at the point of sale. Paired with IMS, e-invoicing thresholds dropping, and Aadhaar authentication for refunds, the rate change is part of a broader push towards a compliance model where the system does the validation and the business does the reporting.

For founders and SME owners, the takeaway is practical: make sure your systems reflect the current rates, your invoicing is accurate, and your monthly reconciliation catches any drift. The penalty for operating at wrong rates is now structural, not just financial.

If your rate mapping, HSN codes, or monthly filings need a review, Tax Garden's GST team can audit your current setup and fix anything that drifted during the transition.

Business owners filing ITR-3 or ITR-4? The AY 2026-27 ITR deadline is 31 August 2026 for non-audit cases, and 21 November 2026 for tax audit cases (extended by CBDT). Coordinate your GST 2.0 rate audit with your ITR preparation to avoid last-minute discoveries.

Explore our plans or see how it works.

This guide references the 56th GST Council decisions of September 2025, the CBIC rate notifications effective September 22, 2025, and Notification 19/2025-Central Tax (Rate), which moved tobacco and pan masala to 40% from 1 February 2026. Rate mapping verified against CBIC circulars, cbic.gov.in rate schedules, cleartax.in/s/gst-rates, bajajfinserv.in/gst-rates-in-india, and vakilsearch.com GST rate guides. Updated May 2026. HSN-specific rates and exceptions should be confirmed against the current CBIC notification for the exact product before issuing invoices or amending returns.

Frequently Asked Questions

What GST rate applies to restaurants after GST 2.0?

Standalone restaurants, whether air-conditioned or not, charge 5% GST without input tax credit. The 18% rate with ITC applies to restaurants inside specified premises, broadly hotels where the value of supply of any room unit exceeded Rs 7,500 per day in the preceding financial year. A standalone restaurant cannot declare itself a specified premises to charge 18% with ITC. Takeaway and delivery through food aggregators also carry 5%, with the aggregator paying the tax.

Did soaps, shampoo and toothpaste become cheaper under GST 2.0?

Yes. From 22 September 2025, everyday toiletries such as toilet soap bars, shampoo, hair oil, toothpaste and toothbrushes moved from 18% to 5%. Kirana stores and FMCG distributors should check that billing software shows 5% for these HSN codes and that selling prices reflect the lower tax.

What happens to ITC on stock bought at the old higher rate?

The input tax credit already taken on stock purchased at 12%, 18% or 28% is not lost when the output rate falls. If your output rate is now lower than the rate on your inputs, credit can pile up, and for goods you can claim a refund of the accumulated ITC under the inverted duty structure in Section 54(3).

Which GST rate applies if the invoice was raised before 22 September 2025 but payment came later?

Section 14 of the CGST Act decides this using three events: date of supply, date of invoice and date of payment. When two of them fall on the same side of the rate change, the rate on that side generally applies. For example, goods supplied and invoiced before 22 September 2025 keep the old rate even if payment was received later.

Is GST still charged on individual health and life insurance premiums?

No. From 22 September 2025, premiums on individual health insurance policies, including family floater and senior citizen policies, and individual life insurance policies are exempt from GST. Group policies bought by employers are still taxed at 18%, so check the policy type on the premium receipt.