Key points
- Since 22 September 2025, the main GST rates are 5% (merit) and 18% (standard), with 40% for a short list of luxury and harmful goods.
- Most items earlier at 12% moved to 5%, and most items earlier at 28% moved to 18%.
- Compensation cess ended for most goods; tobacco products follow a separate timeline.
- Bills issued on or after the change date use the new rate. The exact rule depends on the dates of supply, invoice and payment.
- Update item rates in your billing software, review prices and check your input tax credit position.
What is GST 2.0?
“GST 2.0” is the popular name for the biggest change to GST rates since GST began in 2017. It was announced in August 2025 and approved by the 56th GST Council meeting on 3 September 2025. The new rates took effect on 22 September 2025 for most goods and services.
The aim was simple: fewer rates, fewer disputes about which rate applies, and lower tax on items that ordinary households and small businesses buy every day. Before the change, GST had four main slabs (5%, 12%, 18% and 28%) plus a compensation cess on many goods. After it, most items fall into just two.
The new GST rate structure
| Rate | What it covers | Examples |
|---|---|---|
| Nil / exempt | Basic necessities and some essential services | Fresh food, UHT milk, paneer, Indian breads like roti and chapati, individual life and health insurance, many education and healthcare services |
| 5% | Merit rate: everyday and essential items | Hair oil, soap, toothpaste, butter, ghee, namkeen, most medicines, medical devices, tractors and farm machinery, many textiles |
| 18% | Standard rate for most goods and services | Most electronics, ACs and TVs, small cars and two-wheelers up to 350cc, cement, auto parts, most services |
| 40% | Special rate for luxury and harmful goods | Pan masala and tobacco products, aerated sugary drinks, larger cars, motorcycles above 350cc, yachts and private aircraft |
| 3% and 0.25% | Special rates that continue | Gold and silver (3%), rough precious stones (0.25%) |
Rates are decided by HSN code, not by the general category. Two items that look similar can sit in different slabs. Always check your exact item against the official rate notification.
What moved where
From 12% to 5%
Most items that were at 12% moved down to 5%. This includes many packaged foods such as butter, ghee, cheese and namkeen, most medicines and medical devices, many farm inputs and machines, and a large part of the textile chain. A smaller number of 12% items moved up to 18%.
From 28% to 18%
Most items that were at 28% moved down to 18%. The big ones for businesses are air conditioners, televisions above 32 inches, dishwashers, cement, small cars, two-wheelers up to 350cc and auto parts. Items considered luxury or harmful moved to the new 40% rate instead, usually without the compensation cess they carried earlier.
From 18% to 5%
Several daily-use items that were at 18%, such as hair oil, shampoo, toothpaste, soap and some kitchen items, moved to 5%. Some services such as gyms and salons also moved to 5%, but without input tax credit.
To nil
Individual life and health insurance policies became exempt, along with a list of life-saving medicines, some basic food items like UHT milk and Indian breads, and some school stationery.
How invoices should handle the change
The key question during any rate change is which rate applies to a particular sale. GST answers it with the “time of supply” rules for rate changes (Section 14 of the CGST Act). In simple terms, look at three dates: when the goods or services were supplied, when the invoice was issued and when payment was received. If two of the three fall on or after 22 September 2025, the new rate generally applies; if two fall before, the old rate generally applies.
- Supply, invoice and payment all after the change New rate. This covers almost all bills issued today.
- Advance received before, supply and invoice after Usually the new rate, because two of three events are after the change.
- Supply and invoice before, payment after Usually the old rate, because two of three events were before the change.
Credit notes and debit notes for bills issued before the change normally follow the rate on the original bill.
What it means for stock, prices and credit
- Stock in hand: goods bought at the old rate are sold at the new rate. Your input tax credit on that stock stays with you.
- Prices: where the rate fell, the benefit is expected to reach the customer through lower prices. Keep a record of how you changed prices.
- Accumulated credit: if your inputs are now taxed higher than your output, you may build up credit. A refund for this “inverted duty structure” can be claimed under the refund rules, subject to conditions.
- Items now exempt: if something you sell became exempt, credit on inputs used for it is not available and may need to be reversed.
- MRP labels: packaged goods may need revised MRP labels. Check the latest Legal Metrology instructions for what is allowed.
Checklist: what to do in your billing software
- Update item rates Go through your item list by HSN code and update the GST rate on each item that changed.
- Remove the cess where it ended Check that compensation cess is no longer charged on items where it was withdrawn.
- Check price lists Update selling prices and MRP-based prices so customers see the lower tax.
- Review pending orders and advances Decide the rate for orders that span the change date using the time of supply rules.
- Talk to your CA Confirm any item where the rate is unclear, and plan for credit reversals or refunds.
In Milaan ERP, a rate change is made once on the item. New bills use the new rate from that point, and bills already issued stay as they were. See our GST calculator to check the effect on a price, and the HSN guide for how codes and rates are linked.
This guide explains GST rules in simple words and reflects the law as we understand it on 28 October 2026. Rules, rates and dates change, so please confirm with your CA or the official notifications before acting on it.