GST 2.0: two slabs did not end classification litigation, they moved the battle line

Ninety nine percent of the twelve percent slab went to five. Ninety percent of the twenty eight percent slab went to eighteen. Every one of those movements is a transition dispute waiting to be assessed.

The reform was announced in a day and will be litigated for a decade

On 3 September 2025 the GST Council approved the largest restructuring of Indian indirect tax since 2017. The 12 percent and 28 percent slabs went. Two principal rates remained, 5 percent and 18 percent, with a new 40 percent band for luxury and demerit goods. Fourteen notifications on 17 September 2025 gave it legal effect, and the rates applied from 22 September 2025.

The public story was relief. Essentials cheaper, insurance for individuals exempt, small cars and white goods down from 28 percent to 18 percent, manmade fibre and yarn cut to 5 percent.

The practitioner story is different. Roughly 99 percent of items in the old 12 percent slab moved to 5 percent, and around 90 percent of the old 28 percent slab moved to 18 percent, with the balance escalating to 40 percent. Every movement created a date, and every date created a dispute.

The transition disputes now landing in notices

Time of supply is the first. Where the invoice, the payment and the supply straddle 22 September 2025, Sections 12, 13 and 14 decide the rate, and Section 14 in particular governs the change in rate of tax. Departments are reading it one way and taxpayers another.

Stock in hand is the second. A distributor holding goods bought at 28 percent and selling at 18 percent has an accumulated credit problem that the rate cut did not address.

Credit notes are the third. A post reduction credit note against a pre reduction invoice raises the question of which rate the adjustment carries, and whether the recipient reversed the corresponding credit.

Long term contracts are the fourth, and in government contracts the largest. A price agreed when the rate was 18 percent, delivered when the rate is 5 percent, with an escalation clause that says nothing about tax. Who keeps the difference is a contract question that GST notices will not answer.

The fifth is anti profiteering in substance if not in name. Where a rate came down and the price did not, expect the question, even outside the formal machinery.

Why classification did not go away

Fewer slabs mean fewer boundaries. They also mean higher stakes at every boundary that remains.

The gap between 5 percent and 18 percent is thirteen points. The gap between 18 percent and 40 percent is twenty two points. When a single HSN determination moves that much money, both sides litigate harder, not less.

The interpretive rules did not change. Common parlance, the General Rules of Interpretation, the sole or principal use test the Supreme Court applied in Commissioner of Customs v. Westinghouse Saxby Farmer Limited in 2021, and strict construction of exemption entries.

So the same fights continue on a new map. Is it a food preparation or a beverage. Is it a part of a machine or a general purpose article. Is the supply composite or mixed, and what is the principal supply.

The 40 percent band is the new frontier. Luxury cars, high capacity motorcycles, aerated and caffeinated beverages, yachts, personal aircraft, casinos and betting. Twenty two points of exposure on a definitional question is the most expensive uncertainty in the current rate structure.

The Rate Change Ledger

Every business that touched the transition should be able to produce one document. I call it the Rate Change Ledger.

It has five columns. The product or service. The rate before 22 September 2025 and the notification entry relied on. The rate after and the entry relied on. The transition treatment applied to open orders, advances and stock. And the contractual position on who bears or benefits from the change.

If you can produce that ledger, a rate transition notice takes a week to answer. If you cannot, it takes a year and you will settle.

What is still moving

The Council also moved on structural items alongside the rates. The place of supply of intermediary services was changed to the location of the recipient, which reopened the export status of a whole services industry. The requirement to establish a post sale discount through a prior agreement linked to specific invoices was removed. Risk based provisional refunds were extended to zero rated supplies and to inverted duty structure claims.

Compensation cess was withdrawn on most items from 22 September 2025, continuing only for specified tobacco and pan masala products until the cess obligations were discharged.

Each of those is a separate compliance rebuild. None of them was optional.

Exhibit 1 — The structure before and after 22 September 2025

Rate positions are as notified on 17 September 2025 and effective 22 September 2025. Verify the current entry for any specific HSN before pricing or filing.

Authorities relied on

What to do on Monday

1. Build the Rate Change Ledger for every product and service line that crossed 22 September 2025. Do it before the notice, not after.

2. Re-examine every long term and government contract for a tax clause that allocates the benefit or burden of a rate change.

3. Review your intermediary and cross border service arrangements against the amended place of supply rule and reprice where necessary.

4. Test your top ten revenue HSNs against the 40 percent band boundary and get a written classification opinion for any that sit close to it.

Questions we are asked on this

Which rate applies where the invoice is before 22 September 2025 and the supply is after?

Section 14 governs the change in rate of tax and turns on the sequence of supply, invoice and payment. Map each transaction against the three events; do not apply a single rule to all of them.

What happens to my accumulated credit on stock that now attracts a lower rate?

The credit remains in the ledger. Whether it can be refunded depends on whether an inverted duty structure claim is available for your goods. Most distributors have no refund route and must plan utilisation.

Can a customer demand the benefit of a rate reduction on a running contract?

That is a contract question. Read the tax clause and the escalation clause together. Where the contract is silent, the commercial answer usually follows who bore the tax risk originally.

Is the 40 percent rate applied instead of 28 percent plus cess?

For the covered luxury and demerit categories, the 40 percent rate consolidates the earlier structure into a single rate. Specified tobacco and pan masala products were treated separately pending cess settlement.

Does the intermediary amendment let me claim export refunds for earlier periods?

The amendment is prospective in effect. For past periods the position continues to be governed by the earlier place of supply rule and the litigation around it, including the split verdict in Dharmendra M. Jani before the Bombay High Court.

In this cluster

• Rate change transition: time of supply, credit notes and stock in hand
• Classification disputes under GST: the principles the courts apply
• Westinghouse Saxby: the sole or principal use test and the end of easy classification
• HSN, common parlance and the General Rules of Interpretation
• Composite supply versus mixed supply: the test, and the tax
• Principal supply in bundled contracts: getting the rate right
• Food, beverages and the restaurant service rate maze
• Textiles and apparel: the rate structure and the disputes it produces
• Pharmaceuticals and medical devices: the concession and its boundaries
• Automobiles and auto components: the rate bands and the component question

GST Insights is published by AMLEGALS for general information. Law stated as on 3 September 2026. Not advice on any particular set of facts; not an advertisement or a solicitation under Rule 36 of the Bar Council of India Rules. Readers with a question on their own facts may write to the GST practice of their own accord.