A Note On Major GST Reforms In India

On 03 September 2025, the Indian Ministry of Finance put forth the recommendations of the Goods and Services Tax (GST) Council as part of the next-generation GST reforms. We have referred to this as 'the recommendations' or 'next-gen reforms' in this note. The GST Council made various recommendations relating to changes in GST laws including (1) GST rate reduction, and (2) Process Reforms for facilitation of trade. The former addresses relief to end consumers and latter addresses ease of GST compliance and ease of doing business for industry.

A. Reduction in GST Rates

The previously existing 4-tiered tax rate structure (5%–>12%–>18%–>28%) is now recommended to be changed into a 'Simple Tax' structure. This Simple Tax Structure includes 2 rates including a 'Merit Rate' of 5% and 'Standard Rate' of 18%. Further, a 'De-Merit rate' of 40% has been introduced for select goods and services. Essential commodities and major healthcare related items have been provided for in the 5% category. This has been done in order to make essential goods and services more affordable to the masses. Even aspirational good such as automobiles have a reduced GST rate to fulfil the aspirations of masses.

1. Reduction of GST rate from erstwhile 18% / 12% to 5%

• Tractors (other than Road tractors for semi-trailers >1800 cc), Agricultural diesel engines, Tyres, tubes, gear boxes, confectionaries, cooking essentials, daily household health care/body care essentials, hotel accommodation charging INR 7,500 or below per day
• Mechanical wood pulp, Chemical wood pulp (other than dissolving grades), pulp fibres derived from recovered paper and paperboard
• Pharmaceuticals
  • Diagnostic kits, surgical gloves, glucometers, gauze, bandages, etc.
  • Thermometers for medical, surgical, dental or veterinary usage
  • Instruments & apparatus for physical/chemical analysis for medical, surgical, dental or veterinary uses
• Footwear with sale value not exceeding INR 2500 per pair
• Logistics – Railway transport, Multimodal transport, rent for goods carriage. Here while the GST rate is reduced to 5% without input tax credit, there is also an option for operators to opt for GST @18% with input tax credit
• Synthetic & Artificial filament yarn, Man-made, Synthetic or Artificial filament yarns
• Synthetic or artificial filament tow, Synthetic or artificial staple fibres, etc.
• Construction – Sand lime bricks or Stone inlay work
• Renewable energy
  • Solar cookers, Solar water heaters
  • Fuel Cell Motor Vehicles including hydrogen vehicles based on fuel cell technology
  • Bio-gas plant
  • Solar power-based devices
  • Solar power generator
  • Wind mills, Wind Operated Electricity Generator (WOEG)
  • Waste to energy plants / devices
  • Solar lantern / solar lamp
  • Ocean waves/tidal waves energy devices/plants
  • Photo voltaic cells, whether or not assembled in modules or made up into panels
• Insurance – Third-party insurance for goods carriage

2. Reduction of GST rate from erstwhile 18% / 12% / 5% to NIL

• Pharmaceuticals
  • Select life-saving medicaments including Onasemnogene Abeparvovec, Daratumumab (incl. subcutaneous), Atezolizumab, Risdiplam, Obinutuzumab, Inclisiran, and others (33 drugs in total)
  • Rare/other critical medicaments including Agalsidase Beta, Imiglucerase, Eptacog alfa
• Insurance
  • Individual Health Insurance Policies (including family floater & senior citizen policies)
  • Individual Life Insurance Policies (term life, ULIP, endowment)

3. Reduction of GST rate from erstwhile 28% to 18%

• Consumer durables – Air-conditioning machines, Dish washing machines, Television sets (above 32 inch), Monitors and projectors, set top box for Television and Television set
• Construction – Portland cement, aluminous cement, slag cement, super sulphate cement and similar hydraulic cements, whether or not coloured or in the form of clinkers
• Automobiles
  • Diesel cars, ≤1500 cc and ≤4000 mm length
  • Hybrid diesel + electric cars, ≤1500 cc and ≤4000 mm
  • Petrol /LPG /CNG cars, ≤1200 cc and ≤4000 mm length
  • Hybrid petrol + electric cars, ≤1200 cc and ≤4000 mm
  • All three-wheeled vehicles
  • Road tractors for semi-trailers, >1800 cc
  • Specified parts for vehicles

B. Measures for facilitation of trade – Process Reforms

• MSMEs and Startups – Pre-filled GST returns and automated refund mechanisms to reduce compliance burdens; boost working capital and enhance ease of doing business
• Operationalization of the Goods and Services Tax Appellate Tribunal (GSTAT)
  • GSTAT being a specialized body will reduce burden on High Courts who may lack necessary expertise in GST-specific disputes dedicated appellate forum for uniform interpretation of GST provisions.
  • Appeals are proposed to be accepted before the end of September 2025, with hearings commencing before December 2025
  • This step is likely to bring more consistency in the interpretation and application of GST law and consequently boost investor/taxpayer confidence in GST regime
• Sanction of risk-based provisional refund to facilitate refund claims on account of zero-rated supply of goods or services or both (i.e. export of goods or services or both or supply to a Special Economic Zone developer/unit for authorised operations)
  • General sanction of 90% of refund claimed as provisional refund subject to prescribed norms
• Proposal for Risk-Based Provisional Sanction of refunds arising out of inverted duty structure (IDS)
  • Sanction of 90% of refund claimed on provisional basis, in cases arising out of IDS, on similar lines as is presently available for refund in respect of zero-rated supply
• Amendment in CGST Act to provide for GST Refunds in respect of low value export consignments
  • Previous restriction disallowing refunds below INR 1,000 to be scrapped
  • Small exporters will be able to claim GST refunds even on low-value consignments
• Simplified GST Registration Scheme for Small and Low-Risk Businesses
  • For applicants falling within the low-risk category and those with self-estimated monthly output tax liability not exceeding INR 2.5 lakh, registration to be granted on an automated basis within three working days from the date of application
  • There would be a voluntary option to either opt into or withdraw from the scheme
• Introduction of Simplified Registration Scheme for small suppliers supplying through electronic commerce operators ('ECOs')
  • Presently, such small suppliers making supplies through ECOs across multiple States are required under GST framework to maintain principal place of business in each State. Considerable challenges are faced by them in this regard.
  • A simplified registration mechanism will be introduced for such small suppliers using ECOs across multiple States after due consultation with the GST Council
• Amendment in place of supply provisions for intermediary services
  • Now, place of supply for "intermediary services" will be determined as per the default provision i.e. the location of the recipient of such services¹. This will help Indian exporters of such services to claim export benefits.
• Amendment of provisions in respect of Post Sale Discount
  • It is now decided to
    • omit the requirement of establishing the discount in terms of an agreement entered into before or at the time of such supply and specifically linking of the same with relevant invoices
    • specifically provide that discount should be granted through a credit note issued under prescribed provision²
    • specifically include a reference to provisions pertaining to input tax credit³, so as to provide for reversal of such credit by the recipient in case where a post-sale discount is given and value of supply is reduced through GST credit note
• Issuance of circular on certain issues pertaining to Post Sale Discount
  • In the interest of clarity and ease of business operations, GST Council has recommended that clarifications need to be made on below common issues qua Post Sale Discount:
    • non-reversal of Input Tax Credit on account of post-sale discount through financial/commercial credit note
    • treatment of the post-sale discount provided by manufacturer to the dealer as additional consideration, in the transaction between dealer and end-customer
    • treatment of post-sale discount as consideration lieu of promotional activities etc. performed by the dealer.

C. Way forward

While the above measures are undertaken with the twin objectives of (a) benefiting end consumer through price reduction, spurring consumption and economic growth through reduction in GST rates, and (b) boosting business confidence through simplification of compliance modules and deep process reforms, it is imperative to understand that these recommendations are a result of a continuing consultative process, and further developments may be observed in due course to address ongoing concerns under the GST framework, especially given the global economic climate alongside dynamics of domestic markets.

The current reforms are premised on price reduction that will spur consumption and economic activity. However, under GST law⁴, it is a must that such reduction in GST rates must be passed on to consumers through lower prices. Earlier, this was enforced by the National Anti-Profiteering Authority (NAA), which handled cases and penalized businesses that failed to lower prices. However, in 2022, the NAA's responsibilities were transferred to the Competition Commission of India (CCI), India's anti-trust watchdog and regulator, which has since faced challenges in managing these cases due to limited bandwidth on one hand and expertise and procedural issues on the other.

As of now, the GST Council, Ministry of Finance, Government of India have provided a confirmation that industry bodies/businesses have assured that such benefit shall be passed on to end consumers and that any potential GST profiteering by businesses would be tracked and prohibited by the government on a proactive basis.

Footnotes

1 Under Section 13(2) of the IGST Act, 2017

2 Section 34 of the CGST Act

3 Section 15(3)(b) of the CGST Act

4 Section 171 of the CGST Act, 2017

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.