GST 2.0 rings in positive changes, but businesses have to work fast to be ready for the new structure

The discount can be passed on by issuance of GST credit note to the buyer.

L Badri Narayanan

GST Council in its 56th meeting has recommended significant next-generation reforms for India Inc and consumers. The proposal focuses on rate rationalization, structural reforms and ease of living. The changes proposed in key sectors such as education, health, FMCG, automobile, cement, renewable energy, fertilizer etc., are with an aim to boost domestic consumption.

The quick analysis of the recommendations of the Council are highlighted below:

Reduction in GST rates

The Council has proposed to reduce the tax rates on goods and services affecting the common man and aspirational goods. The Council has proposed three tax slabs – special rate, standard rate and de-merit rate. The change in rates is proposed to be effective from 22nd September, 2025. The industry has approximately 18 days to implement the changes in the system and align their supply chain.

1) Insurance Sector: Long-awaited exemption has been provided for life insurance and health insurance. It may increase the input costs (non-availability of credit) in the hands of insurers leading to surge in premiums. The review of premiums would be required to reduce the short-term impact on loss of credit.

2) Common-man items: GST rates have been reduced from 18%/ 12% to 5% for items such as hair oil, shampoo, tableware, kitchenware, erasers, pencils, food products, bicycle, sports goods, toys.

3) Pharma sector: GST rates on pharma items have been reduced from 12% to 5%. The specified life-saving drugs, cancer treatment, rare / severe chronic diseases have been proposed as ‘Nil’.

4) Handicraft, Wood, Leather, Textile, Renewable energy, fertilizer, agriculture, food sector: GST rates have been reduced from 12% to 5%.

5) Auto Sector: The effective rate has been reduced by 10%-13% with the withdrawal of Compensation Cess. Small cars, three wheelers, two wheelers and commercial vehicles will attract tax at 18%. SUV’s /luxury cars based on engine capacity and length will attract 40% tax which is a reduction of 10% from earlier effective rate.

Withdrawal of Compensation Cess is a welcome move as it makes the compliance and cross-utilization of credit simpler. However, cess paid on transition stock needs to be mitigated to avoid any adverse impact.

Industries such as pharma, EV, FMCG may face inverted duty structure due to reduction in tax rates on output supplies. The question of availability of refund of credit of tax paid on capital goods and input services remains open-ended.

Insurance, gym, food sectors, wherein exemption is provided, may require to reverse or pay amount equal to credit taken in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock and on capital goods, on the day preceding the date of exemption.

Interplay with other laws

The revision in tax rates has an inter-play with the provisions of other laws such as Legal Metrology, DPCO etc. For example, under Legal Metrology law, in the event of revision in tax payable, the manufacturer or the packer are liable to inform revised retail sale price of pre-packaged goods to the retailers. Publish at least two advertisements in newspapers, notices to dealers and to director of legal metrology.

Ease of living - Amendments in favour of industry in general

* Intermediary: The issues relating to ‘intermediary’ services will get settled by omission of the specific place of supply provision. With an amendment, the long-standing interpretational issues, since the erstwhile service tax regime, will finally be laid to rest. The ambiguity around marketing / promotional services, educational support services will be settled.

* Post-supply discounts: The requirement for pre-agreement and invoice linkage for post supply discount will be removed. The discount can be passed on by issuance of GST credit note to the buyer. The supplier will need to reduce its output tax liability whereas the buyer will need to reverse the input tax credit to the extent of credit note. It will ease the supplier in passing the discount to buyers.

* GST Appellate Tribunal: It is proposed to be operational for accepting appeals before the end of September and commence hearing before the end of December this year. Further, all appeals due are to be filed by June 30, 2026 making it obligatory for companies to speed-up.

* 90% provisional refund: Sanction 90% of the refund claimed on account of zero-rated supply and in cases of refund arising out of inverted duty structure.

On the concluding note, the businesses should commence preparing for appeals before GSTAT, re-check classification and evaluate impact on supply chain, pass on the compensation to network partners in the event of reduction in tax rates, prepare advertisements/communications of revised retail sale price. Further, evaluate the inverted duty refund and ITC reversal need under Rule 42/ 43 of the CGST Rules.

(L Badri Narayanan is Executive Partner, Lakshmikumaran & Sridharan Attorneys.)

Views are personal and do not represent the stand of this publication.