The GST 2.0 rate rationalization
Effective 22 September 2025, the GST Council approved a rate rationalization that replaced India’s
earlier four-slab structure (5%, 12%, 18%, 28%, plus a compensation cess on select items) with a
substantially simplified structure built around two primary rates -- 5% for essential and merit goods, and
18% as the standard rate -- alongside a nil/exempt category for specified essentials that continues unchanged.
Goods that were previously taxed at 12% were largely moved to either 5% or 18%, and most goods previously at
28% moved to 18%.
The 40% de-merit rate
A new 40% “de-merit” or special rate now applies to sin goods (such as tobacco and pan masala)
and select luxury goods (such as large cars and yachts), generally replacing the earlier combination of the
28% slab plus a separate compensation cess for these categories. The compensation cess mechanism itself was
wound down as part of this reform, though transitional cess arrangements on some tobacco products tied to
earlier loan-repayment obligations have technical nuances worth checking against current CBIC guidance for
anyone dealing specifically with tobacco taxation.
The legal framework behind the rate change
GST itself continues to be governed by the Central Goods and Services Tax Act, 2017, the Integrated Goods
and Services Tax Act, 2017, the Union Territory GST Act, 2017, and the respective State GST Acts, 2017 -- the
September 2025 changes were implemented through GST Council recommendations and corresponding rate
notifications under these existing Acts, rather than through a new GST statute. This means the underlying
compliance framework (registration, input tax credit, returns filing) is unchanged; what changed is the rate
applicable to specific goods and services. NRI entrepreneurs running an Indian business or e-commerce operation
should confirm that invoicing software, HSN/SAC rate masters, and pricing have all been updated to the current
slab for each product line, since continuing to bill at a pre-reform rate can trigger short-payment demands and
interest even though no new compliance obligation was technically created.
Is there still a 12% or 28% GST slab in India?
No -- since GST 2.0 took effect on 22 September 2025, the 12% and 28% slabs were eliminated, with affected
goods moved to the 5% or 18% slabs, or, for sin and luxury goods, to the new 40% de-merit rate.
Did GST 2.0 require passing a new GST law?
No -- the rate changes were implemented through GST Council recommendations and rate notifications under
the existing CGST Act, 2017, IGST Act, 2017, and related State GST Acts, rather than through new primary
legislation, so the underlying compliance and procedural framework remains the same Acts as before.
What replaced the GST compensation cess on luxury and sin goods?
These goods are now generally taxed at the new flat 40% de-merit rate instead of the earlier combination of
the 28% slab plus a separate compensation cess, though some transitional cess arrangements on certain tobacco
products have continued for technical reasons tied to prior loan-repayment obligations.
