Union Finance Minister Smt. Nirmala Sitharaman chaired the 56th meeting of the GST Council, which was conducted in New Delhi on 3rd September 2025, unveiled sweeping reforms that are set to reshape India’s tax landscape. Through a sweeping reduction in tax rates on essential commodities, the simplification of compliance procedures, and the creation of stronger institutional mechanisms, the 56th GST Council has reaffirmed its resolve to transform GST into a people-centric, pro-growth, and structurally resilient tax framework.
Implementation Date
- The new GST rates on services will be applicable from 22nd September, 2025
- Changes in GST rates on goods except for pan masala, gutkha, cigarettes, chewing tobacco products like zarda, unmanufactured tobacco and bidi (which remain at existing rates until compensation cess loans are cleared), the new GST rates apply from 22nd September 2025.
Simplified GST Rate Framework
For years, taxpayers have navigated a complex four-slab GST system. The Council has now collapsed this into a three-tier structure that is easier to understand. This “Simple Tax” structure reduces classification disputes and makes compliance easier, especially for small businesses.
5% – Merit Rate for essential commodities
18% – Standard Rate for the majority of goods and services
40% – Special Rate only for luxury and demerit items such as large cars, tobacco products, and carbonated beverages
Note: The changes in GST rates will be notified in the rate notification, to be placed separately on CBIC website.
Key GST Rate Revisions for Goods
Relief on Household and Daily Essentials
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NIL GST [From 5%]
- UHT Milk
- Pre-packaged paneer
- Indian breads: chapati, roti, parotta, paratha
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Reduced to 5% [From 18%]
- Toiletries: shampoo, soap bars, hair oil, toothpaste, tooth brushes
- Household items: bicycles, kitchenware, tableware, otherhousehold articles, etc.
- Food items: packaged namkeens, bhujia, sauces, pasta, instant noodles, choclates, coffee, preserved meat, cornflakes, butter, ghee, etc.
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Impact
- Lower grocery and personal care bills
- Directly easing pressure on middle-class households.
Healthcare and Insurance – Affordable Access
- 36 life-saving medicines (including drugs for cancer and rare diseases) have been made completely free
- GST burden on all remaining drugs and healthcare devices has been slashed to 5%, compared to the earlier slabs of 12% and 18%
- Individual life and health insurance policies – including ULIPs, endowment, family floater and senior citizens covers are now exempt from GST.
- Impact: Cost of both treatment and protection brought down, which is crucial move for social welfare.
Support for Farmers, Infratructure and Renewable Energy
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GST reduced from 12% to 5% on
- Agricultural machinery : tractors, soil preparation tools, harvesters, threshers, composting machines, etc.
- Agricultural machinery : tractors, soil preparation tools, harvesters, threshers, composting machines, etc.
- GST reduced from 28% to 18% on cement, providing a major relief for housing and infrastructure development.
- Impact: Balance affordability for end users with support for domestic producers through continued input tax credit benefits.
GST Rationalisation in Automobiles and Transportation
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GST reduced from 28% to 18% on
- Small cars (≤1200cc petrol/CNG, ≤1500cc diesel)
- Motorcycles ≤350cc
- Three-Wheelers
- Buses, trucks, ambulances
- 40% flat GST rate [from 28% + cess (45–50% effective)] on Large cars, SUVs, MUVs (>1500cc).
- Impact: Ensure affordability for mass transport while sustaining revenue from luxury segments.
Key GST Rate Revisions for Services
- Hotel accommodation costing up to ₹7,500 per day will now be taxed at 5% GST instead of 12%.
- Beauty and wellness services such as salons, gyms, barbers, and yoga centres also move to 5% (earlier 18%).
- Goods transport continues at 18% but with input tax credit (ITC) allowed, preserving neutrality for logistics firms.
Compliance Reforms and Dispute Resolution
Beyond rate cuts, compliance has been simplified:
- By September 2025, the much-anticipated GST Appellate Tribunal (GSTAT) will open for appeals, with hearings scheduled to start in December.
- Provisional refunds of up to 90% in inverted duty cases will ease liquidity for exporters and manufacturers.
- GST registration for low-risk applicants, who make up about 96% of new registrations, will be completed within three working days.
- Small e-commerce sellers operating across multiple states will now benefit from a simplified registration mechanism.
Key Questions to Consider
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Under Section 14(a)(i) of the CGST Act, 2017, when goods or services are supplied before a change in the GST rate but the invoice is issued afterward, the applicable tax rate depends on the timing of the payment:
- Case 1: Payment received after the rate change – The “time of supply” is the earlier of the two dates: the invoice issuance date or the payment receipt date.
- Case 2: Payment received before the rate change – The “time of supply” is considered to be the date on which the payment was made.
- Example: If a supplier delivers goods before a GST rate change but invoices afterward, and payment is received after the rate change, the applicable rate depends on whether the invoice date or payment date comes first and if payment is received before the rate change, the GST rate at the payment date applies.
The applicable GST rate is determined according to the time of supply provisions outlined in Section 14 of the CGST Act, 2017
- Under Section 16(1) of the CGST Act, 2017, it is laid down that:
- Input Tax Credit (ITC) can be claimed by a registered person on the tax paid for inward supplies, provided the supplies are used or intended to be used in the course or furtherance of their business, Subject to the conditions, restrictions, and procedures prescribed under the Act, particularly under Section 49 of the CGST Act, 2017, the eligible ITC is credited to the registered person’s electronic credit ledger (e-credit ledger).
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Key Points:
- Eligibility: The inward supply must be taxed at the rate prevailing at the time of supply.
- Condition: Tax should be duly charged by the supplier on such supplies.
- Restriction and Procedure: ITC can be claimed only in accordance with the conditions and manner laid down under Section 49
- Example: If a registered person receives goods taxed at 18% as per the current GST rates and intends to use them for business, they can claim credit of the 18% tax paid, following the prescribed rules.
- The IGST applicable on imported goods will generally be the same as the GST rate notified, unless a specific IGST exemption has been separately prescribed.
- Example: If mobile phones attract 12% GST as per the rate notification, then the same 12% IGST will apply on their import, unless an exemption notification states otherwise.
- Once the input tax credit (ITC) is validly claimed and reflected in the electronic credit ledger, it can be utilized to pay off any output tax liability in accordance with Section 49(4) of the CGST Act, 2017 and the rules framed under it.
- Example: If a taxpayer has ITC of ₹10,000 in the e-credit ledger and an output GST liability of ₹12,000, then ₹10,000 can be adjusted from ITC, and only the balance ₹2,000 needs to be paid in cash.
- This matter has been clarified through Circular No. 135/05/2020-GST dated 31.03.2020 (as amended). The circular explains that a refund of accumulated Input Tax Credit (ITC) under clause (ii) of the first proviso to Section 54(3) of the CGST Act is admissible only when input GST rates are higher than the GST rate on the corresponding output supplies, credit tends to accumulate.
- However, if the same goods or services are involved as both input and output, but the variation in tax rates arises merely due to a change in GST rates over time, then such a situation does not fall under the scope of clause (ii) of the said proviso, and hence refund is not available.
- Example: If fabric is purchased at 12% GST and later supplied as fabric at 5% GST, refund of accumulated ITC is allowed. But if fabric is purchased and sold as fabric (same goods) where the GST rate itself was revised from 12% to 5%, refund will not be available.
- The Input Tax Credit (ITC) can be utilized to settle the outward tax liability on supplies of goods or services (or both) made up to 21st September, 2025. However, for supplies made on or after 22nd September, 2025, when the revised GST rate comes into effect, the ITC relating to such supplies will need to be reversed as per the provisions of the CGST Act, 2017.
- Example: If a taxpayer uses ITC to pay GST on an invoice dated 20th September 2025, it is allowed. But if the supply is done on September 22, 2025, the ITC cannot be used and must be reversed.
- According to Rule 138 of the CGST Rules, 2017, generating an e-way bill is mandatory before commencing the transport or supply of goods. When there is a change in GST rates, there is no requirement to cancel or regenerate e-way bills for goods that are already in transit. Such e-way bills will remain valid until the expiry of their originally prescribed validity period.
- Example: If an e-way bill was generated on 30th June for goods in transit and the GST rate changes from 1st July, the same e-way bill will stay valid till its expiry and does not need to be reissued.
Final Word
More than a rate rationalisation exercise, the 56th GST Council meeting represents a reset in policy. By focusing on essentials, healthcare, agriculture, and small businesses, while keeping luxury and sin goods under higher tax, the reforms strike the right balance between social equity and fiscal stability. For compliance professionals and businesses, the message is clear: GST is evolving into a simpler, fairer, and more citizen-centric tax system designed to drive India’s next phase of economic growth.
Disclaimer
The information provided in this article is intended for general informational purposes only and should not be construed as legal advice. The content of this article is not intended to create and receipt of it does not constitute any relationship. Readers should not act upon this information without seeking professional legal counsel.