1. INTRODUCTION
The 56th Goods and Services Tax Council ("GST Council") meeting held in New Delhi, on September 3, 2025, marked the launch of next-generation Goods and Services Tax ("GST") reforms.
The GST Council made several recommendations, the star of which was the implementation of a twotiered GST rate structure along with rate rationalisation on various goods and services. Key recommendations include operationalisation of the Goods and Services Tax Appellate Tribunal ("GSTAT"), streamlining refunds and returns processes, amongst others. We have provided a summary of these recommendations along with our comments below:
2. TWO-TIERED GST STRUCTURE
The GST Council has removed the earlier 12% (twelve per cent) and 28% (twenty-eight per cent) rates and approved a simplified two-tiered tax structure of 18% (eighteen per cent) and 5% (five per cent). Additionally, a 40% (forty per cent) demerit rate has been introduced for luxury and sin goods, including tobacco, high-end automobiles, and carbonated beverages. The new rate structure will take effect from September 22, 2025.
Streamlining the GST slabs is expected to significantly reduce litigation over classification disputes, as well. This reform goes beyond mere rate rationalization and is fundamentally focused on simplifying the tax structure and enhancing the ease of doing business in India, especially for Micro, Small, and Medium Enterprises (MSMEs).
3. KEY RECOMMENDATIONS RELATING TO RATE CHANGES
It is pertinent to note that several significant rate rationalisation recommendations were made by the GST Council in its 56th meeting. For the present purpose, key recommendations with respect to rate reductions can be found here.1
4. GOODS AND SERVICES TAX APPELLATE TRIBUNAL OPERATIONALISATION
The operationalisation of the GSTAT has been announced, with the tribunal set to start accepting appeals by the end of September 2025, with hearings commencing by the end of December. The GST Council has recommended allowing all pending appeals to be filed by June 30, 2026, which will help clear the backlog of cases. This announcement comes as a welcome move for assesses, as many cases and issues that are stuck because of the lack of an appellate forum will soon be able to see the light of day.
The Principal Bench will also serve as the National Appellate Authority for Advance Ruling, giving businesses greater certainty, a boost for trust and ease of doing business under the GST regime.
5. CHANGES IN THE INVERTED DUTY STRUCTURE
The GST Council has approved a fast-tracked refund mechanism under the Inverted Duty Structure ("IDS"). Pending requisite amendments to the Central Goods and Services Tax Act, 2017 ("CGST Act"), the Central Board of Indirect Taxes and Customs ("CBIC") will administratively begin granting 90% (ninety per cent) provisional refunds arising out of IDS.
The GST Council has also corrected long-pending IDS in key sectors such as:
- Man-made textile sector: GST on man-made fibre reduced from 18% (eighteen per cent) to 5% (five per cent) and on man-made yarn from 12% (twelve per cent) to 5% (five per cent).
- Fertiliser sector: GST on sulphuric acid, nitric acid, and ammonia cut from 18% (eighteen per cent) to 5% (five per cent).
- Renewable energy sector: GST on devices and parts for their manufacture reduced from 12% (twelve per cent) to 5% (five per cent).
These measures will ease working capital blockages and reduce refund delays, directly improving liquidity for businesses.
6. DE-MERIT GOODS
Pan masala, gutkha, cigarettes, chewing tobacco products, and unmanufactured tobacco have been classified as de-merit goods and placed in the 40% (forty per cent) tax bracket, up from the earlier 28% (twenty-eight per cent). However, the implementation of the increased rate has been deferred until all outstanding loan and interest obligations under the compensation cess account are fully discharged.
Additionally, instead of being taxed on transaction value, GST will now be levied on the Retail Sale Price ("RSP") for these products.
The GST Council has also raised the rate on specified actionable claims like betting, casinos, gambling, online money gaming etc., to a uniform 40% (forty per cent) with Input Tax Credit ("ITC").
7. INSURANCE SECTOR REFORMS
In a major relief for individuals, the GST Council has exempted all individual life and health insurance policies from GST. This means premiums for policies like basic term insurance, Unit Linked Insurance Plan's ("ULIP"), family floater health plans, and senior citizen policies will no longer carry the earlier 18% (eighteen per cent) tax.
By removing the tax on these essential financial safeguards, the GST Council aims to boost social security and financial well-being for families, ensuring greater access to healthcare and life cover.
8. AUTOMOBILE SECTOR CHANGES
The automobile industry stands to gain significantly from the GST Council's rationalisation measures:
- GST on small cars reduced from 28% (twenty-eight per cent) to 18% (eighteen per cent).
- Motorcycles with engine capacity not exceeding 350 (three hundred fifty) cc will now attract 18% (eighteen per cent) GST instead of 28% (twenty-eight per cent).
- Buses, trucks, and ambulances have also had their GST reduced from 28% (twenty-eight per cent) to 18% (eighteen per cent).
However, GST rates for premium cars, Sports Utility Vehicles, and big motorcycles with engine capacity exceeding 350 (three hundred fifty) cc have been raised, placing them in the 40% (forty per cent) de-merit band.
Importantly, the varied tax structure for auto parts has been simplified into a single 18% (eighteen per cent) rate irrespective of their HS code, which will potentially reduce classification disputes.
9. INTERMEDIARY SERVICES REFORM
The GST Council has recommended the omission of clause (b) of Section 13(8) of the Integrated Goods and Services Tax Act, 2017 ("IGST Act"), which fixed the place of supply as the location of the supplier in cases involving 'intermediary services'. With this deletion, the default rule under Section 13(2) will apply, making the location of the recipient of services the place of supply.
As a result, services such as marketing, facilitation, and support services rendered to foreign clients may now be able to avail export benefits, including zero-rating and refund of ITC. This also significantly reduces disputes between exporters and tax department, wherein the Department was rejecting refunds on the grounds of the exporter being an intermediary.
10. POST-SALE DISCOUNTS AMENDMENTS
Section 15(3) of the CGST Act is proposed to be amended to do away with the requirement that such discounts must be pre-agreed and reflected in the tax invoice. Instead, the law will provide for such discounts to be passed on, only, through a GST credit note, accompanied by a mandatory reversal of ITC by the recipient in these cases.
At the same time, a Circular2 is issued to clarify the followings aspects: (i) that no ITC reversal is needed where discounts are extended via financial or commercial credit notes, (ii) treatment of the post-sale discount provided by manufacturer to the dealer, and (iii) the manner of dealing with discounts granted in exchange for promotional activities undertaken by dealer.
11. CMS INDUSLAW VIEW
This time around, along with the industry, even consumers were waiting with hope for the 56th GST Council meeting. Even though the PM had announced the intention of the Government to reduce the burden of tax and increase consumption in India, the GST Council has both the Union and the States' representatives finalising decisions. Therefore, a common consensus was absolutely required for these reforms to be pushed through. In that sense, these are definitely 'big bang reforms'.
The Council's move toward rate rationalisation, trimming GST on everyday essentials and farm equipment will ease the cost of living and also boost consumption. The simplified two-tiered structure addresses a long-standing demand from the industry and should significantly reduce classification disputes.
The GST Council also signalled intent to simplify compliance and resolve some key issues, particularly through proposals around returns, refund processes, clarifications on key issues like post sale discounts, GST implications on intermediary supplies etc. Not to forget that the operationalisation of GSTAT will significantly ease the mounting pressure on high courts and pave the way for faster disposal of pending matters.
Having said the above, challenges remain. The absence of a robust anti-profiteering framework means that the benefits of tax cuts may not automatically flow to consumers. To counter the same, the Ministry of Consumer Affairs, on September 9, 2025, issued a Circular3 granting permission to the manufacturers or importers of pre-packaged commodities to declare the revised retail sales price.
With two comprehensive GST Council meetings in 2024 and 2025, it appears the intention is to bring more clarity, simplicity, and resolution to industry-wide concerns, aligning with India's broader agenda of institutional reforms that foster investment and growth in the global economy.
Footnotes
1. A comprehensive account of all the recommendations may be referred to in the Press Release issued by the Press Information Bureau on September 3, 2025, available at https://www.pib.gov.in/PressReleseDetailm.aspx?PRID=2163555.
2. Circular number 251/08/2025-GST dated September 12, 2025 issued by Department of Revenue, Central Board of Indirect Taxes and Customs
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