GST Rate Classification Disputes 2026: Lessons After GST 2.0

Last reviewed: 25 September 2026. GST 2.0 took effect on 22 September 2025, replacing the earlier four-slab structure of 5%, 12%, 18% and 28% with two principal slabs — 5% (merit) and 18% (standard) — plus a special demerit rate of 40% that applies only to enumerated items such as pan masala, gutkha, cigarettes and other tobacco products, aerated and other specified non-alcoholic beverages, high-capacity motor vehicles, aircraft and yachts for personal use, and specified actionable claims. 40% is not a residuary rate — 18% is — and the nil, 0.25% and 3% rates continue alongside. The rationalisation genuinely resolved several long-running anomalies overnight: Indian breads went to nil, namkeens and savoury snacks to 5%, and popcorn to a single 5%. Many businesses assumed classification disputes would fade away with it. They have not. Wherever a product can plausibly be described under more than one HSN heading with a different rate outcome, show-cause notices, audit queries and Authority for Advance Ruling (AAR) references continue to arrive, often months after the relevant invoices were already raised at what the seller believed was the correct rate.

Why classification disputes survive GST 2.0

It helps to be precise about what GST 2.0 actually did. It collapsed the number of slabs a product could be assigned to, which removed a category of dispute that existed purely because two adjacent slabs (say 12% and 18%) sat close together and businesses had an incentive to argue for the lower one on marginal facts. What GST 2.0 did not do is rewrite the underlying classification scheme — the Customs Tariff-based HSN (Harmonised System of Nomenclature) headings and sub-headings that every supply must still be slotted into remain exactly as detailed as before. A product can still sit at the boundary between a heading that attracts 5% and one that attracts 18%, and that boundary is where disputes are born. If anything the revenue stake has gone up. The gap between the two principal slabs is wider than several of the old adjacent-slab gaps, and where a product sits near the 40% demerit entry the gap is 35 percentage points — larger than any rate difference that existed under the old four-slab structure.

The legal test: HSN description and trade parlance, not your invoice

The settled position — reaffirmed repeatedly by Advance Ruling Authorities and higher courts across VAT, excise and now GST jurisprudence — is that classification is decided by matching the product against the HSN entry description, read together with the General Rules of Interpretation, and where the entry itself is ambiguous, by how the product is commonly understood in the trade (the “common parlance” test). What a seller chooses to print on the invoice, or what marketing calls the product, may carry some persuasive value but is never conclusive. Two further sub-principles matter in practice after GST 2.0. First, a specific entry prevails over a general one, and a carve-out in the rate notification is read strictly: where the entry reads “fruit pulp or fruit juice based drinks other than carbonated beverages”, a single feature outside that description — carbonation, an added ingredient, a different form of packing — moves the product to the residuary entry at a far higher rate. Second, where the notification itself fixes a monetary threshold, as it now does for garments, made-up articles and footwear, the rate turns on the sale value per piece or per pair and not on any qualitative description at all, so what looks like a classification argument becomes a valuation argument.

The live fault lines after GST 2.0 — and the ones that closed

The sharpest live fault line today is in non-alcoholic beverages, where the gap is 5% against 40%. Serial numbers 150 and 151 of Schedule I carry “fruit pulp or fruit juice based drinks other than carbonated beverages” (HSN 2202 99 21 and 2202 99 29) and “beverages containing milk” (HSN 2202 99 31 and 2202 99 39) at 5%, while other non-alcoholic beverages and caffeinated beverages sit in Schedule III at 40%. The Government re-cut this framework through Notification No. 01/2026-Central Tax (Rate) dated 30 April 2026, amending Notification No. 09/2025-Central Tax (Rate) dated 17 September 2025, with effect from 1 May 2026 (as updated by a corrigendum dated 6 May 2026; the text is on the CBIC GST portal, and the HSN entries should be read from that current text). The carbonated-fruit-beverage question that has been litigated since the pre-GST era therefore survives GST 2.0 in a considerably more expensive form: a drink that is genuinely fruit-pulp based but carries any degree of carbonation falls outside the 5% entry on the express words of the description.

The second is the value threshold on garments and footwear. From 22 September 2025 readymade garments and made-up articles are taxed at 5% where the sale value does not exceed ₹2,500 per piece and at 18% above that, and footwear follows the same ₹2,500 test per pair — up from the earlier ₹1,000 line, with the higher rate up from 12% to 18%. The threshold applies per piece or per pair, not to the invoice total, so a bill for ten shirts at ₹800 each is entirely at 5% while a single ₹3,000 jacket is at 18% on its whole value. Queries are already running on how a two-piece set, a garment sold with an accessory, or a discounted transaction value against a higher MRP is to be tested against the threshold. Renewable energy is a third: solar and other renewable energy devices came down from 12% to 5%, but an EPC contract is still split 70:30 with the goods component at 5% and the service component at 18%, and items such as mounting structures and controllers remain at 18% in their own right — so the composition of the contract, not its label, decides the effective rate.

Two disputes we were regularly asked about have, by contrast, been closed by GST 2.0 rather than continued by it, and clients should be clear about that. All Indian breads — chapati, roti, paratha and parotta — moved to nil with effect from 22 September 2025, which ends the parota-versus-roti argument; the Kerala High Court had in any event already set aside the adverse advance ruling in Modern Food Enterprises (2024) and held Classic and Whole Wheat Malabar Parota classifiable under HSN 1905 at 5%, not 18%. Popcorn, which had been split across three rates on salted, pre-packaged and caramelised variants, was consolidated to a uniform 5% precisely to remove the classification question, and namkeens, bhujia, mixture and extruded or expanded savoury products all came to 5% from 12% or 18%. A business still carrying a demand or a draft reply on either of these should press the point for the period concerned rather than treat it as a live risk going forward.

Where the fault lines typically run

The table below summarises the boundaries where classification disputes are actually running after 22 September 2025. It is illustrative of the type of fault line, not an exhaustive list of rates, since rate schedules should always be checked against the current notification for the specific HSN code in question.

Worked example: what a wrong classification call actually costs

Assume a beverage manufacturer has been classifying a fruit-based drink at 5%, on the view that it is a fruit pulp or fruit juice based drink. Over eighteen months the company invoices ₹8 crore of sales of this product at 5% GST (₹40 lakh output tax collected and paid). On audit the department takes the view that the product is carbonated and therefore falls outside the Schedule I description “other than carbonated beverages”, landing in the residuary entry for other non-alcoholic beverages at 40%. The recomputed liability is ₹8 crore × 40% = ₹3.2 crore. After deducting the ₹40 lakh already paid, the differential demand is ₹2.8 crore, to which the department adds interest under Section 50 (18% per annum from the original due date of each return) and, where the show-cause notice alleges the classification was not merely a bona fide error, a penalty of up to 100% of the tax short-paid under Section 74/74A where suppression or wilful misstatement is alleged, or the lower penalty under Section 73 where it is treated as a bona fide dispute. Section 74A governs periods from FY 2024-25 onwards; Sections 73 and 74 govern earlier periods. On an eighteen-month run the exposure comfortably crosses ₹3.5 crore once interest is added. The same arithmetic at the garment threshold — 5% claimed, 18% held applicable on the same ₹8 crore — produces a differential of ₹1.04 crore. The point for a promoter is that the size of the exposure now depends on which boundary the product is standing near, and because GST returns are self-assessed the department can reach back across the full period the classification was used, not just from the date of the notice. How such a notice is answered, and how the Section 73, 74 and 74A routes differ, is covered in our guide to GST notices under Sections 73, 74 and 74A.

Importers and foreign brands

The same HSN classification that decides the GST rate on domestic sales also drives basic customs duty and the IGST charged at import, so a classification error on an imported product is usually paid for twice. Foreign FMCG and beverage brands entering India through a local subsidiary or distributor should settle the classification before launch: a GST advance ruling for the Indian entity, and where the import classification itself is uncertain, a customs advance ruling as well. The application is made by the Indian entity, whether it is already registered or is applying for registration (s.95(c), CGST Act) — see our GST registration guide. We support India-entry set-ups of this kind through our foreign subsidiary accounting and FEMA compliance service.

Common mistakes and red flags

• Classifying a new or reformulated product by analogy to a similar-sounding existing product, without checking the specific HSN entry and its exclusions.
• Treating a favourable AAR ruling obtained by a different applicant, for a similar but not identical product, as binding on your own business — an AAR ruling binds only the applicant and the jurisdictional officer for that applicant.
• Changing the recipe, processing method or packaging of a product without re-checking whether the classification (and therefore the rate) still holds.
• Scaling up sales volume at a self-assessed lower rate on a genuinely debatable product before validating the position, rather than after.
• Assuming GST 2.0’s slab merger automatically resolved a pre-existing classification dispute for your specific product — the merger changed which slab applies to a given heading, not which heading your product falls under.
• Assuming the opposite — continuing to pay at the older, higher rate, or conceding a demand, on a dispute that GST 2.0 actually closed (Indian breads at nil; popcorn, namkeens and savoury snacks at a uniform 5%) for periods from 22 September 2025.
• Not documenting the technical/commercial basis (ingredients, process flow, trade understanding) for the classification adopted, which becomes critical evidence if the position is later challenged.

What should you do now

For any product where classification is genuinely arguable — meaning a reasonably informed competitor or tax officer could credibly argue for a different HSN heading — the practical discipline is to resolve the question before volume builds up, not after. An Advance Ruling applied for under Section 97 is binding, under Section 103, on the applicant and on the concerned or jurisdictional officer in relation to that applicant, and is the most defensible route for a product that is about to be launched or scaled. Where volumes are already significant and no ruling has been sought, a documented internal classification memo — covering the HSN entry relied on, the process and ingredient basis, and any comparable rulings considered — at least demonstrates that the position was taken in good faith rather than carelessly, which matters for the question of penalty even if the classification is eventually overturned. Businesses selling beverages, garments, footwear, made-up articles, packaged food or renewable energy systems should build a periodic review into the compliance calendar, because the rate notifications themselves are still being re-cut — Notification No. 01/2026-Central Tax (Rate) redrew the beverage entries with effect from 1 May 2026 — and a classification that was defensible last year may need re-checking this year.

Frequently asked questions

This article is general information for educational purposes, not an opinion on any specific case or a substitute for professional advice; the legal position summarised here can change, so please verify current status and consult a qualified professional before acting on your own facts.