GST Rate Structure Simplified: 5%, 18% and 40% Slabs Explained

Auto-drafted from official sources and under review by CA Rajeev Ranjan. Verify against the original notification before you act.

What Has Changed

India's GST rate structure has been significantly overhauled. The GST Council has approved a move to a cleaner, two-slab system:

• 5%, for essential or lower-category goods and services
• 18%, the standard rate for most goods and services
• 40%, a special rate applied to luxury and sin goods

The existing 12% and 28% slabs are being removed. This is the most significant rationalisation of the GST rate structure since the tax was introduced in 2017.

The 40% special rate applies specifically to: pan masala, tobacco products, aerated drinks, high-end cars, yachts, and private aircraft.

This change is enacted through the Finance Act 2026 and operationalised via Notification 01/2026-Central Tax (Rate) dated 30 April 2026, with a correction issued on 6 May 2026. Businesses should read the corrected notification carefully, as the 6 May version supersedes the original.

Who Is Affected

Practically every GST-registered business in India will feel some impact, but the effect varies:

• Businesses currently on the 12% slab, your tax rate is changing. You need to determine whether your goods or services now fall under 5% or 18%. This affects pricing, contracts, and invoicing.
• Businesses currently on the 28% slab, if your products are not in the luxury/sin category, you may see a rate reduction to 18%. If they are (tobacco, pan masala, aerated drinks, high-end vehicles, yachts, private aircraft), your new rate is 40%.
• Businesses supplying luxury or sin goods, you are moving to the 40% slab. Review your pricing structure and pass-through arrangements immediately.
• Consumers and end-customers, prices on many goods may shift. Businesses should communicate rate changes clearly.

What You Should Do

1. Identify which new slab applies to each of your products or services. Do not assume, check the official notification (01/2026-Central Tax (Rate), corrected 06-05-2026) and the corresponding state tax notifications.
2. Update your invoicing and accounting software to reflect the correct new rates before raising invoices under the new structure.
3. Review existing contracts that reference specific GST rates or include tax as a separate line item, these may need amendments.
4. Check transitional provisions in the Finance Act 2026 for any guidance on goods already in supply chains or contracts signed before the effective date.
5. Recalculate input tax credit (ITC) positions, rate changes can alter your ITC eligibility and reversal calculations.

If your business straddles multiple categories or you are unsure of classification, consult your CA before issuing invoices under the new rates. Getting the slab wrong creates liability for short payment of tax and potential penalties.

Source: Official notification