GST Rate Changes 2025 (GST 2.0): What Small Businesses Must Update

On 3 September 2025, the 56th GST Council meeting replaced the old four-slab structure (5%, 12%, 18%, 28%) with two main rates, 5% and 18%, plus a special 40% rate for a few luxury and “sin” items. The new rates applied from 22 September 2025 to services and to almost all goods. Pan masala, cigarettes and tobacco followed from 1 February 2026. If you sell goods or services, you need to have updated item rates, invoices, prices and your handling of old stock. This guide checks the essentials.

The government calls this the “next-generation GST reform”; it is widely known as GST 2.0.

What changed in GST rates in 2025?

Before 22 September 2025	From 22 September 2025
5%	Mostly stays 5%; some essentials cut to nil
12%	Mostly cut to 5%; some moved to 18%
18%	Mostly stays 18%; many common-use items cut to 5%
28% (+ cess on some items)	Mostly cut to 18%; luxury/sin items moved to 40%
Compensation cess on cars, aerated drinks and similar	Removed on most goods (tobacco items continued until 31 January 2026)

Other special rates, such as 3% on gold and nil-rated items, continue. Rates go by HSN code, not by category name. Two products that sound similar can carry different rates.

Examples of verified rate changes (goods)

These examples come from the GST Council’s official press release. Use them as a guide only. Check your exact HSN in the CBIC rate notifications.

Item	Old rate	New rate
UHT milk, pre-packaged paneer, Indian breads (roti, paratha)	5%	Nil
Butter, ghee, packaged namkeen, sauces, pasta, chocolates, coffee	12% or 18%	5%
Hair oil, toilet soap, shampoo, toothpaste, toothbrushes, bicycles, kitchenware	12% or 18%	5%
Most medicines and drugs	12%	5%
Tractors and specified farm machinery	12%	5%
Air conditioners, all TVs, dishwashers	28%	18%
Small cars, motorcycles up to 350cc, three-wheelers, buses and trucks	28%	18%
Cement	28%	18%
Auto parts	Varied	18% (uniform)
Larger cars, motorcycles above 350cc, yachts, aircraft for personal use	28% + cess	40%
Aerated and sugar-added drinks, caffeinated beverages	28% + cess	40%

What changed for services?

Service	Old rate	New rate
Hotel rooms up to ₹7,500 per night	12% with ITC	5% without ITC
Gyms, salons, barbers, yoga centres (beauty and well-being)	18% with ITC	5% without ITC
Individual life and health insurance policies	18%	Exempt
GTA (goods transport agency), forward-charge option	12% with ITC	18% with ITC (5% option unchanged)
Cinema tickets up to ₹100	12%	5%
Casinos, race clubs, betting, online money gaming, entry to events like the IPL	28%	40%

“Without ITC” means the business cannot claim input tax credit (ITC), the GST paid on its own purchases, for that service. Restaurant services stayed at 5% without ITC. The Council also clarified that a stand-alone restaurant cannot opt for 18% with ITC by calling itself a “specified premises”.

What changed for tobacco and pan masala in 2026?

Tobacco products did not move on 22 September 2025, because compensation cess was still needed to repay loans taken for state compensation. From 1 February 2026:

• pan masala, cigarettes and most tobacco products moved to 40% GST, and bidi to 18%,
• compensation cess on them was withdrawn,
• a new Health Security se National Security Cess on pan masala and additional excise duty on tobacco apply, both outside GST,
• GST on these items is now charged on the retail sale price rather than the transaction value.

Since then, CBIC has also issued smaller amendments. One example is a reclassification of certain beverages under heading 2202, effective 1 May 2026. That is one more reason to check the current notification for your HSN.

What should small businesses update?

1. Item master and HSN codes

Update the rate against every HSN in your billing or accounting software. Check items that used to be at 12% or 28% one by one, because they moved in different directions.

2. Invoices and e-invoices

Make sure tax invoices, e-invoices and e-way bills show the correct rate and HSN. Our GST invoice format guide covers the mandatory fields.

3. Prices and MRP

GST is charged on the price you bill, so revise price lists to pass on cuts. For pre-packed goods made before 22 September 2025, the Department of Consumer Affairs relaxed Legal Metrology rules. Revised-MRP stickers were made optional, and old packaging material could be used up to 31 March 2026. That window has now closed, so new packs must carry correct MRPs.

4. Invoices that straddled 22 September 2025

Section 14 of the CGST Act decides the rate when supply, invoice and payment fall on different sides of the change date. Broadly, the rate follows two of the three events.

Goods/services supplied	Invoice	Payment	Rate
Before 22 Sept	Before	After	Old
Before 22 Sept	After	Before	Old
Before 22 Sept	After	After	New
After 22 Sept	Before	Before	Old
After 22 Sept	Before	After	New
After 22 Sept	After	Before	New

Example: You delivered goods on 15 September 2025 and invoiced them the same day at the old 12% rate, but the customer paid on 30 September. Supply and invoice were both before the change, so the old 12% rate stays correct.

These issues mainly affect old returns now. They can come up in notices or in your annual return for FY 2025-26; see our GSTR-9 guide.

5. Stock and input tax credit

• GST applies on the supply, not on your stock. Anything you sold on or after 22 September 2025 had to carry the new rate, even if you bought it earlier at a higher rate.
• A lower rate alone doesn’t require you to reverse ITC on stock.
• If your output became exempt or “without ITC”, you must stop claiming ITC on related purchases and may need to reverse credit. This applies, for example, to individual insurance, hotels up to ₹7,500, and salons and gyms. See blocked and restricted credits.
• Rate cuts can leave you with an inverted duty structure, where you pay more GST on inputs than on outputs, so credit builds up. From 1 November 2025, refunds of this credit are sanctioned 90% provisionally on a risk-based basis.

Watch out: Car dealers and others with unused compensation cess credit on 22 September 2025 are in a disputed area that has reached the Supreme Court. Get professional advice rather than writing it off or using it on your own reading.

Does GST 2.0 affect composition dealers?

The composition scheme rates (such as 1% for traders and manufacturers, 5% for restaurants and 6% for eligible service providers) were not part of the slab change. Composition dealers still have to buy at the new rates and sell within their limits; see our composition scheme guide.

Common mistakes

• Updating the category but not the HSN. Rates are tied to HSN codes, so a “household item” label is not enough.
• Charging the old rate on old stock after the change date.
• Continuing to claim ITC after moving to a “without ITC” rate.
• Ignoring the 40% rate for larger cars, bikes above 350cc and aerated drinks.
• Assuming tobacco moved on 22 September 2025. It moved on 1 February 2026.
• Relying on old rate charts. Use the CBIC notifications, and watch for updates after the GST Council meeting scheduled for 7 October 2026.

What to do next

Export your item master, check every HSN against the current rate notification, and fix any invoices raised at the wrong rate through credit or debit notes. Our GST calculator helps you check the new rates.

If you’d like a rate audit of your product list or help correcting past invoices, our GST return filing team can help. You can also request a callback.