31 Oct 2025Updated: May 2026
GST rates in India are set by the GST Council, which meets periodically to review rate structures, rationalise classifications, and respond to industry representations. Rate changes affect both input costs and output pricing for businesses, and the wrong GST rate on either purchases or sales creates ITC mismatches, customer disputes, and potential show-cause notices.
Here is a summary of the significant GST rate revisions and classification changes that are currently in effect, relevant for businesses across sectors in FY 2026–27.
The Four-Rate Structure — Where Things Stand
India's GST operates on a four-rate structure: 5%, 12%, 18%, and 28%, plus a nil rate for exempted goods and services. The GST Council has been working toward rationalising this structure — specifically reducing the number of items in the 12% slab and moving them to either 5% or 18% — but significant consolidation is still pending as of 2026.
The current broad classification:
- Nil rate: Essential food items (fresh vegetables, fruits, milk, eggs, unbranded cereals), health and education services, government services
- 5%: Packaged food, edible oils, life-saving drugs, transport services (rail, economy class air), restaurant services (non-AC)
- 12%: Processed food, computers, mobile phones, business class air travel, work contracts for affordable housing
- 18%: Most manufactured goods, IT services, financial services, restaurant services in hotels with room tariff above ₹7,500, most professional services
- 28%: Luxury and sin goods — automobiles (certain categories), tobacco, aerated beverages, casinos, online gaming
Key Rate Changes and Clarifications in Effect
Online gaming and casinos (28% on full face value): With effect from 1 October 2023, online gaming platforms and casinos are taxed at 28% on the full face value of bets placed — not on the gross gaming revenue or platform fee. This was a significant rate increase for the sector and has been upheld through subsequent GST Council reviews.
Renting of residential dwellings to registered persons: If a registered business rents a residential property for use as a residence for its employees, GST applies under reverse charge mechanism (RCM) at 18% — payable by the recipient (the company), not the landlord. This is a common compliance gap — companies renting residential properties for employee accommodation must self-assess and pay GST under RCM and ensure ITC eligibility is confirmed.
Milk cans and carry bags (12%): Milk cans (steel, iron, aluminium) used for transport of milk are classified at 12%. Carry bags with handles made of plastics attract 18%. Correct classification matters for input credit purposes for manufacturers and distributors.
Works contract — government infrastructure (12%): Works contracts involving construction of roads, bridges, railways, metro, airports, irrigation projects, and certain government projects are taxed at 12%. Other works contracts (commercial construction) remain at 18%.
Restaurant services — rate clarification: Restaurant services in hotels where the room tariff is ₹7,500 or more per night attract 18% GST (with ITC). All other restaurant services attract 5% without ITC. The threshold applies to the hotel's room tariff, not the restaurant bill. This distinction matters for hotel operators with F&B operations.
Health insurance and term insurance: The GST Council has recommended reducing GST on health insurance and term insurance premiums — currently at 18% — but as of the current filing period, the rate change has not yet been formally notified. Businesses and individuals should check the current rate with their insurer before filing claims.
HSN Code Reporting — Mandatory for All Taxpayers
HSN (Harmonised System of Nomenclature) code reporting in GSTR-1 is mandatory:
- Taxpayers with annual turnover up to ₹5 crore: 4-digit HSN codes for B2B invoices
- Taxpayers with annual turnover above ₹5 crore: 6-digit HSN codes for all invoices
Incorrect HSN codes in GSTR-1 trigger mismatches in GSTR-2B for buyers and flag discrepancies in the AI-based scrutiny system. Verify that your billing software is using the correct 6-digit (or 4-digit) HSN/SAC code for every line item.
Inverted Duty Structure Refunds
An inverted duty structure arises where the GST rate on inputs is higher than on outputs — meaning the business accumulates ITC that cannot be set off against output tax. Certain sectors face this structurally: textile manufacturers (5% output on fabrics, 12%/18% inputs), certain agricultural products, and specific manufacturing industries.
Refunds of accumulated ITC under Section 54(3) are available for inverted duty structure cases — but the refund formula excludes ITC on capital goods and inputs used for exempt supplies. The refund process requires careful computation, and claims must be filed within 2 years from the relevant date. Given that Budget 2026 has tightened ITC matching requirements, any disputed ITC in GSTR-2B will delay refund processing.
For SMEs and businesses navigating GST rate classification and refund claims, visit SME Advisory for sector-specific guidance.
Regi Tom Antony And Associates handles GST rate classification, GSTR reconciliation, inverted duty refunds, and GST notice responses for businesses across Kerala. Contact: letstalk@rtaandassociates.com | Kakkanad, Kochi.