GST 2.0 & India’s Bakery MSMEs: What Changes, Who Pays, and How to Stay Compliant

India’s GST 2.0 rationalisation—moving toward a two-slab regime (5% “merit” and 18% “standard”) with a special higher rate for sin/ultra-luxury goods—will directly touch the bakery value chain from flour to finished goods. For MSMEs running neighbourhood bakeries, contract facilities, and mid-scale brands, the big questions are: Which items move slabs? What happens to input tax credit (ITC) and cash flow? And how should pricing and compliance be reset before the Council’s early-September meeting finalises the contours?

Below is SMEStreet’s sector-specific explainer.

1) The “New GST Rules” for the Bakery Sector — What’s changing under GST 2.0

A. Rate architecture is being simplified.

• The policy direction is to scrap the 12% slab, consolidate into 5% & 18%, and retain special high rates for a narrow sin/luxury basket. Final calls rest with the GST Council (scheduled in early September). This reduces classification disputes—a chronic pain point for food processors and bakers.

B. Food essentials may see wider relief, but classification still rules.

• Fresh, unbranded bread has been exempt (0%); rusks/toasted bread typically at 5%; cakes, pastries, biscuits generally at 18% under HSN 1905. Under GST 2.0, expect continuity for essentials and re-binning of today’s 12% items (e.g., some savoury ready-to-eat lines under 2106) either to 5% or 18%—driving winners and losers within bakery SKUs.

C. Compliance is tightening but getting more digital help.

• Refunds and portal changes are being streamlined (e.g., handling of minor-head mismatches) to ease claim filing. Expect continued push on e-invoicing and pre-populated returns, with larger dealer networks nudged into near-real-time reporting. For small bakeries, this means cleaner vendor hygiene and GST-ready POS/ERP are no longer optional.

D. Anti-profiteering & MRP resets.

• Any rate cuts (say, a move from 12% → 5%) will require transparent pass-through or a defensible price-mix rationale. Document the math now (pre- and post-GST 2.0 landed costs) to avoid future disputes.

2) What different slabs mean, product-by-product

Note: Final categorisations are notified post-Council; below is a working map for planning.

*Chocolate-coated/cream-filled biscuits usually face 18%; plain/simple variants may see lower rates only if expressly notified.

Three scenarios MSMEs should model now:

1. 12% → 5% (favourable): Opportunity to drop price or expand margin; ensure anti-profiteering documentation.

2. 12% → 18% (adverse): Rework recipes/packsizes; push private-label/modern trade to share the hit; tighten promotions.

3. Mixed re-binning: Some SKUs benefit while others cost more—rebalance your catalog to defend contribution per kg.

3) The bakery P&L: where GST 2.0 bites—or helps

Inputs are mostly 5–18%; outputs straddle 0–18%.

• Flour, sugar, cocoa, chocolate, dairy fats, emulsifiers, improvers, flavors, packaging films/cartons skew 18%. When you sell exempt/5% items (e.g., fresh bread, rusks), ITC accumulates—locking working capital. If GST 2.0 expands 5% coverage without correcting input asymmetry, inverted duty pain persists.

• Portal changes to refunds ease filing, but timeliness remains critical for MSME cash cycles.

Pricing power varies by sub-category.

• Celebration cakes/pastries (18%) can absorb shocks via premiumisation (design, weight-slab engineering). Mass biscuits/rusks are price elastic; small changes in MRP/grammage can swing volumes.

Distribution decides pass-through.

• MT/e-com/private label can share duty shocks; GT (kirana) often demands a full MRP reset. Build channel-wise pricing sheets for each slab case.

4) The sector’s major pain points under GST 2.0

1. Classification ambiguity (and disputes)

   • Fine lines between “fresh unbranded bread” (0%) vs branded/packaged (5%), between plain vs coated/filled biscuits (5% vs 18%), and 1905 vs 2106 for certain savouries and mixes. Edge-cases trigger notices and back-duty risk.

2. Inverted duty structure & delayed ITC refunds

   • Selling at 0%/5% while buying most inputs at 18% blocks cash. Delays in refunds throttle working capital, especially for high-volume, low-margin bakeries.

3. Anti-profiteering exposure during slab cuts

   • If 12% items move to 5%, you must prove benefit pass-through (or defend value-add). Poor documentation risks demand notices.

4. Compliance overhead for micro bakeries

   • E-invoicing thresholds, e-way bill rules, vendor ITC matching, POS hygiene—all cost time and software. Many micro units remain semi-formal, amplifying transition friction.

5. Vendor hygiene & credit discipline

   • Blocked ITC if suppliers default on filing; credit notes/debit notes alignment; and returns reconciliation errors that spiral into penalties.

5) What MSME bakeries should do now (90-day playbook)

A. Rate-scenario pricing & SKUs

• Prepare 5%/18%/mixed P&L sheets per SKU; pre-draft MRP and grammage changes; align with distributors/modern trade on shared burden.

B. ITC & refunds

• Clean up GSTR-2B reconciliation, vendor follow-ups, and HSN-wise cost trails. Use the portal’s new refund facilitation to file early and track; segregate cost centres for exempt/5% lines to document inverted-duty accumulation.

C. Compliance & systems

• GST-ready POS/ERP with HSN auto-coding, batch-wise BOMs, and e-invoice connectors. Lock a month-end close ritual: stock-ledgers, waste/write-off mapping, and outward supply audits.

D. Procurement engineering

• Negotiate vendor-side credit and quantity breaks for 18% inputs; shift to GST-clean suppliers to avoid ITC risk; explore alternate recipes (e.g., cocoa butter equivalents, emulsifier swaps) without hurting label claims.

E. Documentation for anti-profiteering

• Maintain a file with pre/post rate landed costs, revised MRPs/grammages, communication to trade, and margin bridges; this reduces risk of disputes.

F. Segment strategy

• Premium pastries/cakes: defend value via design and freshness; inflation-proof with smart pricing ladders.

• Mass rusks/biscuits: focus on throughput, pack-price architecture, route-to-market and input hedges (sugar/dairy).

6) Policy suggestions from the bakery trenches

• Fix inverted duty for bakery essentials (e.g., allow faster, automated refunds for 0%/5% output producers with 18% inputs).

• Issue a unified food-processing classification compendium (HSN decision trees with examples: plain vs coated, fresh vs preserved, dine-in vs takeaway).

• Time-bound refund SLAs with interest for delays; enable dashboard-level tracking visible to taxpayers and field officers.

• MSME compliance light-touch: extend e-invoicing threshold relief, and offer pre-filled returns with assisted reconciliation for B2C-heavy small units.

Bottom Line

GST 2.0’s two-slab simplicity can genuinely help bakery MSMEs—but execution is everything. If the Council widens the 5% basket for everyday foods and accelerates ITC refunds, bakeries gain price headroom and liquidity. If not, inverted duty and classification ambiguity will continue to eat margins. The smartest MSMEs are acting now: modelling slab outcomes, cleaning ITC, readying MRPs, and locking vendor hygiene—so Day-1 of GST 2.0 feels like a tailwind, not a storm.

References (3–5 links)

1. Times of India: GST rate cuts & two-slab structure on Council agenda (Aug 22, 2025) — proposed 5% & 18% model
   https://timesofindia.indiatimes.com/business/india-business/gst-rate-cuts-coming-soon-goods-and-services-tax-council-to-meet-for-2-day-session-starting-sept-3-two-slab-structure-in-works/articleshow/123458205.cms

2. India Today: GST 2.0 proposals — widen nil rate, scrap 12%, selective cuts from 18% (Aug 28, 2025)
   https://www.indiatoday.in/business/story/gst-council-tax-cuts-updates-milk-chocolates-textiles-fertilizers-2778009-2025-08-28

3. CBIC: Official GST goods & services rates and Council clarifications (master page; latest circulars/press notes)
   https://cbic-gst.gov.in/gst-goods-services-rates.html

4. ClearTax (HSN 1905): Bakery items (bread, cakes, pastries, biscuits) — current GST & codes (2025)
   https://cleartax.in/s/bread-pastry-cakes-biscuits-other-bakers-wares-gst-rates-hsn-code-1905

5. Economic Times (ET Wealth): GSTN portal update to ease refund claims (Aug 28, 2025)
   https://economictimes.indiatimes.com/wealth/tax/gst-refund-made-easy-gstn-has-done-this-change-in-gst-portal-for-hassle-free-tax-refund-claims/articleshow/123563023.cms