GST 2.0: Rate Rationalisation impact on Sector Wise

Introduction

India’s move toward a simpler GST structure (“GST 2.0”) rationalises multiple slabs and rebalances rates across goods and services. This brief summarises: (i) what changed in macro terms, (ii) the industry-wise impact based on our discussion, and (iii) selected item-specific changes drawn from the attached Appendix for ready reference. Where a 5% rate applies without Input Tax Credit (ITC), that supply must be treated akin to exempt for apportionment under Rules 42/43. Businesses should reassess pricing, contracts, and credit planning before their cut-over.

Executive Summary

• Simplified slab focus: most activity converges at 5% and 18%; 0% and 3% continue for specific items; a new 40% de-merit band applies to a limited set of sin/luxury goods.
• 12% band largely shifts to 5% for goods (many everyday items cheaper); remaining items move to 18%. Most historical 28% items move to 18%; a few move to 40%.
• Net effect: input costs for many industries fall (especially where goods moved 12% to 5% or 28% to 18%). Some services that moved 12% to 18% see higher outward tax but can claim ITC.
• Operationally important: at 5% without ITC, output tax is paid in cash and related common credits may need reversal under Rules 42/43; plan to utilise existing credits before switching.

GST 2.0 Overview — Macro Changes

• Broad rate architecture: 0%, 3%, 5%, 18%, and 40% (de-merit).
• Typical migrations: (a) many 12% goods to 5%; (b) most 28% goods to 18%; (c) select sin/luxury items to 40%.
• Cess pared back except special cases; always verify specific notifications for tobacco and other de-merit categories.
• Compliance lens: confirm HSN-wise coverage, conditions (e.g., “same line of business”), and effective dates before ERP updates.

Service Sector — What Our Discussion Highlighted

• Works contracts (incl. government): outward tax 12% to 18% (with ITC); key inputs like cement (28% to 18%), sand (12% to 5%), paints (28% to 18%) are cheaper. Net cost effect: small ↑ (~1–2%) or neutral after ITC.
• Hotels & Restaurants: rooms ≤ ₹7,500 at 5% without ITC (earlier 12% with ITC); rooms > ₹7,500 at 18% with ITC; restaurants typically 18% with ITC where any room > ₹7,500. Risk of stranded ITC for hotels operating wholly at 5%. Mixed hotels require Rule 42/43 apportionment.
• Passenger air: economy class remains 5% without ITC; business/executive 12% to 18% with ITC. Premium fares may see ~3–4% increase due to cheaper inputs offsetting rate hike; economy neutral.
• Passenger road & Goods transport: option re-aligned to 5% (without ITC) or 18% (with ITC). Operators must pick regime; 5% lowers rate but blocks ITC. Declarations/process to be clarified in notifications.
• Other services touched: local delivery 18% (no change); many job-work activities 12% to 5% (some pharma job-work at 5% with ITC); CETP/biomedical waste 12% to 5%; entertainment cinemas ≤ ₹100 at 5%; casinos/race clubs at 40%; beauty & wellness indicated 18% to 5% (conditions to be checked).

Selected Goods Sectors — Snapshot of Rate Changes (from Appendix)

Below are selected highlights to illustrate the direction of change across key goods sectors. These are examples only; for the complete lists, refer to the Appendix and official notifications.

Food

• UHT milk, paneer, pizza bread, khakhra/roti: reductions including 5% to Nil in cases; paratha/Indian breads: 18% to Nil in Appendix examples.
• Large set of items 12% to 5% (e.g., cheese, ghee/butter oil, nuts, dried fruits, sauces/condiments, namkeens, beverages containing milk).
• De-merit: pan masala, aerated/ flavoured/ caffeinated beverages: 28% to 40%; some non-alcoholic beverages to 40%; selected others 18% to 40%.

Tobacco

• Bidi wrapper leaves, Indian katha: 18% to 5%.
• Unmanufactured and manufactured tobacco products (incl. cigarettes, biris, certain inhalation products): 28% to 40%.

Agriculture & Fertilisers

• Engines ≤15HP, pumps, irrigation equipment, agricultural machinery, tractors & trailers: many 12% to 5%.
• Acids (sulphuric, nitric) and ammonia: 18% to 5%; bio-pesticides and micronutrients: 12% to 5%.
• Tractor tyres/tubes/parts and hydraulic pumps: many items 18% to 5%.

Coal

• Coal, lignite, peat: 5% to 18% (cost push for coal users).

Renewable Energy

• Solar cookers/water heaters, biogas/wind/solar devices & PV cells: 12% to 5%; fuel-cell motor vehicles (≤4000mm): 12% to 5%.

Textiles

• Wide coverage of yarns, nonwovens, carpets, labels, embroidery and technical textiles: many 12% to 5%; some apparel/made-ups >₹2,500 move 12% to 18%.

Health & Education

• Extensive list of drugs/medicaments and devices: 12% to 5% or 12% to Nil; some critical therapies move 5% to Nil.
• Erasers 5% to Nil; several stationery items (maps, sharpeners, pencils, notebooks) 12% to Nil; maths/geometry boxes 12% to 5%.

Common-Use Items

• Tooth powder, candles, safety matches, feeding bottles, kitchenware/utensils (wood/metal), bicycles & parts, furniture of bamboo/cane: 12% to 5%.
• Soaps, talcum, hair oil/shampoo, toothpaste/floss/toothbrushes: 18% to 5%.

Consumer Electronics

• Air-conditioners, dishwashers, televisions/monitors/projectors: 28% to 18%.

Paper

• Textbook/notebook paper: 12% to Nil; multiple pulps/packaging items: 12% to 5%; certain graphic papers: 12% to 18%.

Transport (Goods)

• New pneumatic tyres (many types), small cars/two-wheelers/EV hybrids ≤ thresholds, goods vehicles, bodies, parts: 28% to 18%.
• Luxury/personal-use autos, high-cc motorcycles, yachts/aircraft for personal use: 28% to 40%.

Construction & Handicrafts

• Sand-lime bricks/stone inlay work: 12% to 5%; cement: 28% to 18%.
• Broad set of handicrafts across wood/stone/metal/glass/ceramics/textiles: 12% to 5%.

Industry-wise Impact — What to Expect

Compliance Watch-outs

• 5% without ITC: treat as exempt-equivalent for Rule 42/43; apportion or reverse common credits.
• Option changes (e.g., transport at 5% vs 18%): will likely require a declaration; watch for exact procedure and timing.
• Contracting: include tax variation clauses; document pass-through methodology where inputs become cheaper.
• Systems: update ERP/PoS tax masters, rate tables, and ITC flags; ensure billing teams are trained on the new structure.

Action Checklist for CFOs & Owners

• Map outward vs inward rates for your SKUs/services; identify any credits at risk of being stranded if shifting to 5% without ITC.
• Run pricing scenarios for key contracts (works contracts, transport, hotels) and decide 5% vs 18% options where available.
• Prepare customer communication and anti-profiteering notes for pass-throughs where inputs are cheaper.
• Take an inventory/credit snapshot at cut-over; plan utilisation of existing credits before moving to 5% supplies.
• Track government notifications/circulars for effective dates, HSN coverage, and conditions (e.g., ‘same line of business’).