GST 2.0 New Tax Slabs: 5%, 18% and 40% Rates Explained

From 22 September 2025 India switched from a four-rate GST system to a simpler structure built around just two main slabs, 5% and 18%, with a separate 40% rate kept only for a short list of luxury and sin goods.

The 56th GST Council, chaired by the Union Finance Minister, met in New Delhi on 3 September 2025 and cleared the overhaul the same day. The reform is widely called “GST 2.0” because it replaces the original four-slab design that India had used since GST began in 2017.

The clearest way to understand the change is to see the structure side by side. Most items did not just keep their old rate, they were re-sorted into the new buckets.

The 12% and 28% slabs no longer exist. The compensation cess that used to sit on top of many 28% items has been folded into the new rates, so the 40% rate on sin and luxury goods largely absorbs what was earlier charged as 28% plus cess rather than being a fresh price shock.

The new rates apply to supplies made on or after 22 September 2025. GST works on “time of supply”, so the rate is decided by when the goods or services are supplied (broadly, the invoice date or payment date), not by when you happened to walk into the shop or place an order earlier.

Goods already sitting in a shop are not re-stickered automatically. A trader sells fresh stock at the new rate from 22 September, but any tax invoice raised before that date stays on the old rate. There is no special “transition form” for an ordinary shopkeeper; the rate simply follows the invoice date.

This worried many small businesses, but the position is reassuring. Input tax credit (ITC) already lying in your electronic credit ledger remains usable; the rate change does not wipe it out. You keep claiming credit on eligible purchases as before. What changes is the rate you charge on new outward supplies, not the credit you have already earned. If you receive a notice questioning your returns during this switch, see our guide on how to reply to a GST demand notice under Sections 73 and 74A.

The reform was overwhelmingly a set of rate cuts. The biggest winners are ordinary households:

• White goods and electronics such as air conditioners, televisions, refrigerators and washing machines moved from 28% to 18%.
• Cement dropped from 28% to 18%, which lowers the tax cost of building or repairing a home.
• Small cars (petrol under 1200cc or diesel under 1500cc, and under 4 metres long) fell from 28% to 18%. For a deeper breakdown see GST on cars, two-wheelers and SUVs.
• Daily-use items like toothpaste, bicycles and pressure cookers moved down into the 5% slab.
• Individual health and life insurance premiums became fully GST-exempt (nil) from 22 September 2025, covered in detail in our article on the insurance premium exemption.

Very little got costlier for an average family. The reform did not raise rates on everyday goods. The only items kept in a deliberately high bracket are luxury and sin goods, which now sit at the special 40% rate: products such as pan masala, tobacco, aerated and caffeinated drinks, and luxury cars. Because the old 28% plus compensation cess has been merged into this single 40% figure, the headline number looks higher even though much of it is the cess that already existed. So a 40% tag does not automatically mean the shelf price jumped.

The new rates took effect on 22 September 2025. The 56th GST Council had approved them in New Delhi on 3 September 2025.

The 12% and 28% slabs were abolished. Their items were re-sorted mainly into the 5% and 18% slabs, while a new 40% rate was created for luxury and sin goods.

It applies only to a small set of luxury and “sin” goods, for example pan masala, tobacco, aerated and caffeinated drinks, and luxury cars. Everyday products are not in this bracket.

No. From 22 September 2025, individual health and life insurance premiums are GST-exempt (nil). Read more in our dedicated insurance exemption guide.

Yes. Input tax credit already in your electronic credit ledger stays usable. The rate change applies to new supplies by time of supply; it does not cancel credit you have already earned.

It depends on the time of supply, which is broadly the invoice or payment date. Goods supplied on or after 22 September 2025 carry the new rate even if you enquired earlier.

For most items the cess has been folded into the new rates. The 40% rate on sin and luxury goods largely absorbs the earlier 28% plus cess rather than adding a fresh charge.

No. The slab change does not require re-registration. If you are a small supplier, check whether the composition scheme suits you separately.

• Press Information Bureau, GST Reforms 2025 (56th GST Council) https://www.pib.gov.in
• ClearTax, Next-Generation GST Reforms 2025 https://cleartax.in/s/next-generation-gst-reforms
• ClearTax, GST rates in India 2026 https://cleartax.in/s/gst-rates

• GST exemption on health and life insurance premiums (2025)
• GST rates on cars, two-wheelers and SUVs after the 2025 reform
• How to reply to a GST demand notice under Sections 73 and 74A
• GST composition scheme: who is eligible
• The RTI Playbook