The 56th GST Council met on 3 September 2025 and recommended the largest restructuring of GST rates since the tax began. CBIC notified it on 17 September 2025 and almost all of it took effect on 22 September 2025.
The headline is simple enough: 12 and 28 per cent are gone, most things sit at 5 or 18 per cent, and a 40 per cent rate now applies to a short list of demerit goods. The practical work was not simple at all, and a good deal of it is still being cleaned up.
The structure now
| Schedule | Rate | Broadly covers |
|---|---|---|
| I | 5% | Essential goods, food grains, dairy, pulses, spices, most medicines, renewable energy equipment |
| II | 18% | The standard rate. Processed foods, cement, ores, sports goods, toys, most manufactured goods |
| III | 40% | Demerit and luxury. Aerated and caffeinated drinks, large cars, yachts, personal aircraft, gambling |
| IV | 3% | Gold, silver and platinum jewellery, semi-processed gems, specified handicrafts |
| V and VI | 0.25% and 1.5% | Rough and industrial diamonds, uncut gemstones |
| VII | 28% | Pan masala, tobacco and cigarettes, retained pending discharge of the compensation cess obligation |
The tobacco carve-out is the one exception to the 22 September date. Tobacco and its products stayed at 28 per cent until the compensation cess loan and interest obligations were discharged, rather than moving with everything else.
What came down
Most daily-use goods moved to 5 per cent from 12 or 18. Hair oil, shampoo, toothpaste, soap, toothbrushes and shaving cream went from 18 to 5. Butter, ghee, cheese, pre-packaged namkeen, utensils, feeding bottles and sewing machines went from 12 to 5.
Agriculture did well. Tractor tyres and parts went from 18 to 5, small tractors under 1800 cc from 12 to 5, along with drip irrigation systems, sprinklers, specified bio-pesticides and micro-nutrients, and a range of agricultural and horticultural machinery.
Healthcare saw the most consequential change. Individual health and life insurance became exempt, from 18 per cent. Thirty-three listed drugs and medicines went to nil, medical grade oxygen, diagnostic kits and reagents, glucometers and test strips and corrective spectacles to 5 per cent.
Education stationery went to nil: maps, charts, globes, pencils, sharpeners, crayons, exercise books and erasers.
In automobiles, small petrol cars up to 1200 cc and 4000 mm, small diesel cars up to 1500 cc and 4000 mm, three wheelers, motorcycles up to 350 cc and goods transport vehicles all moved from 28 to 18. Air conditioners, televisions, monitors, projectors and dishwashers followed the same path.
What went up
Coal, lignite and peat moved sharply, from 5 to 18 per cent, which fed straight into power and cement costs.
The demerit list moved from 28 to 40: pan masala and tobacco products, aerated waters, caffeinated and carbonated beverages, larger cars and hybrids, motorcycles above 350 cc, personal aircraft, pleasure yachts, revolvers and pistols. Casino and race club admission, IPL and similar sporting events, bookmaker licensing and specified actionable claims including betting, gambling, horse racing, lottery and online money gaming went from 28 to 40, with credit still available.
Paper moved from 12 to 18, other than exercise book paper. And in textiles, apparel and made-ups above ₹2,500 per piece went from 12 to 18, which created a value-threshold classification problem that had not existed before.
The exemption that is not entirely good news
The insurance exemption is worth its own paragraph, because exemption and zero-rating are not the same thing and the difference falls on the supplier.
When individual health and life insurance became exempt, the premium stopped carrying GST, which is what the customer sees. But an exempt output supply also means the insurer can no longer claim input tax credit attributable to it. Commissions, reinsurance, IT systems, office rent, all of the input side that was previously creditable against an 18 per cent output now has to be apportioned under Sections 17(2) and 17(3), with the exempt portion reversed under Rules 42 and 43.
So the reduction in the customer’s premium is smaller than 18 per cent, because part of the benefit is absorbed by the insurer’s newly blocked credit. Anyone modelling the pass-through needs to net that off rather than assuming the full rate cut flows through.
The changeover, which is where the real work was
A rate change on a fixed date means every transaction that straddles the date has to be placed on one side or the other. Section 14 of the CGST Act governs this, and it is the provision to read rather than reasoning from first principles.
Section 14 works off three events: the date of supply, the date of the invoice, and the date of payment. Where the supply happened before the rate change, the rate depends on whether the invoice and payment both fell after it. If both did, the new rate applies. If either fell before, the old rate applies. Where the supply happened after the rate change, the logic mirrors: if both invoice and payment were before, the old rate applies, otherwise the new one does.
The cases that caused the most trouble in practice:
Advances received before 22 September for goods supplied afterwards. The advance was received at one rate and the supply happened at another, and Section 14 decides which governs. Getting this wrong in either direction creates a short payment or an excess.
Continuous supply of services spanning the date. Monthly retainers, annual maintenance contracts, subscriptions. The value has to be split at the changeover and each part taxed at its own rate. There is no averaging.
Goods in transit. Dispatched under the old rate, received under the new one, with an e-way bill generated at the old rate. Everything downstream has to be consistent with whichever rate Section 14 lands on.
Credit notes against pre-change invoices. A credit note carries the rate of the original invoice, not the rate current when it is issued. A sales return in November against a September invoice at 28 per cent is credited at 28 per cent.
Inverted duty structure, corrected in places and created in others
Part of the Council’s stated purpose was to correct inverted duty structures, where inputs are taxed higher than outputs and refund claims accumulate. Fertilisers and fabrics were specifically addressed.
But moving coal from 5 to 18 per cent while many outputs sit at 5 per cent created inversion elsewhere, particularly for coal-intensive manufacturers. If your output is at 5 and a major input has gone to 18, you are now accumulating credit that can only come back through a refund claim under Section 54(3), with the formula in Rule 89(5) and its restrictions.
The refund process was eased in the same package. From 1 November 2025, CBIC moved to a system of 90 per cent provisional refunds for inverted duty structure and zero-rated supplies, granted on risk-based data analysis, with the provisional refund order in FORM GST RFD-04 within seven days. Notification 14/2025-Central Tax excludes some categories from provisional refund entirely, including registered persons without Aadhaar authentication under Rule 10B and suppliers of areca nuts, pan masala, tobacco and essential oils.
What still needs doing
If this has not been worked through fully, the following are the items that tend to remain open.
Masters. Every HSN and SAC in the item master needs its rate confirmed against Notification 09/2025 rather than assumed. The 12 and 28 per cent slabs no longer exist, so anything still carrying them is producing wrong invoices.
Value-threshold items. Apparel above and below ₹2,500 per piece now attract different rates. If the item master carries one rate per SKU, it cannot express that, and the logic has to move to the invoicing layer.
Contracts with tax-inclusive pricing. Where a contract quotes an inclusive price, a rate change moves the margin, not the price. Those need to be identified and renegotiated or repriced.
Anti-profiteering. Where a rate has come down on goods sold to consumers, the commensurate reduction in price is a live obligation under Section 171, and the evidence that it was passed on is worth documenting at the time rather than reconstructing later.
Annual return changes. Notification 13/2025-Central Tax also revised GSTR-9 and GSTR-9C, adding ITC rows and clarifying the placement of reclaimed credit with references to Rules 37, 37A, 38, 39, 42 and 43, and adding fields in 9C for supplies covered by Section 9(5). The annual return for a year spanning the change is not the same form as the year before.
The one-line summary
Two slabs, 5 and 18, with 40 for demerit goods, 3 for jewellery and 28 retained for tobacco. Effective 22 September 2025 by notifications 09/2025 to 17/2025-Central Tax (Rate). The rates are the easy part. Section 14, the value thresholds, the new inversions and the credit consequences of the insurance exemption are where the work actually is.
