Summary: This blog unpacks the sweeping GST rate rationalisations announced by the 56th GST Council meeting, covering key sectors such as food, healthcare, FMCG, agriculture, consumer goods, automobiles, infrastructure, and more. Beyond listing rate changes, we analyse their policy intent, business impact, and compliance challenges, from ITC reversals and refund reforms to supply chain recalibration and pricing strategies. For businesses, this is not just about new tax slabs but about aligning operations and strategy with a shifting indirect tax landscape.
On September 3, 2025, India’s indirect tax landscape underwent its most dramatic transformation since the Goods and Services Tax (“GST”) was first rolled out in 2017. At its 56th meeting, the GST Council approved sweeping reforms. At the stroke of a pen, the Council collapsed the unwieldy four-slab structure into a simpler, two-rate system, rationalised long-disputed classifications, corrected inverted duty structures, and laid the foundation for faster dispute resolution.
From Four Slabs to Two
For years, businesses and consumers alike have bemoaned the complexities of GST’s multi-slab architecture. The previous rates 5 per cent, 12 per cent, 18 per cent, and 28 per cent created endless spawning litigation over classification. Now, the Council has opted for simplicity: 5 per cent slab for essentials and mass consumption goods such as food items, medicines, and personal care products; 18 per cent slab for most other goods and services, including electronics, automobiles (except luxury vehicles), and a wide range of services; 40 per cent slab introduced exclusively for “sin” and luxury goods tobacco, pan masala, aerated drinks with sugar, and high-end vehicles.
Rate revision on everyday items promises cheaper baskets for households, on large appliances, a boon for consumer durables. Even automobiles below 300cc are set to become more affordable, while luxury SUVs face a hefty 40 per cent GST.
Anti-Profiteering Under GST: The Ghost That Refuses to Fade
This rationalisation has two inevitable consequences. First, consumers will expect immediate and visible reductions in shelf prices. Second, businesses must ensure their pricing, packaging, and contracts align seamlessly with the new tax reality to comply with the anti-profiteering provision.
Post April 2025, even though the anti-profiteering authority is not empowered to admit new complaints, companies still must pass on the benefits of reduced GST rates or increased input tax credit (“ITC”) to the consumers since the anti-profiteering provision is statutorily effective. In other words, even though the national anti-profiteering authority cannot accept any new cases, its effectiveness continues to bite the suppliers.
Correction of Inverted Duty Structures
One of the central themes of the GST Council’s latest reforms is the correction of the long-standing issue of inverted duty structures, where input taxes were higher than output taxes, leading to blocked working capital and refund disputes. By aligning GST rates on critical inputs with the rates on finished products, the Council has sought to minimise credit accumulation and reduce dependence on refunds. At the same time, the move to introduce 90 per cent provisional refunds from November 2025 provides a safety net for sectors where inverted duty structures cannot be fully eliminated, ensuring liquidity relief and faster cash cycles. This dual approach rate rationalisation and refund facilitation signals a structural correction aimed at easing compliance burdens, improving industry cash flows, and creating a more balanced, investment-friendly tax regime.
Blockage of ITC
The GST rate rationalisation into a broad 5 per cent–18 per cent structure (with 40 per cent for luxury and sin goods), while simplifying compliance, also raises challenges around ITC management. Where goods purchased at a higher rate remain unsold in the supply chain as of the rate change (September 22, 2025), dealers and retailers may face mismatches between purchase and sale rates. As clarified earlier, inverted duty refunds will not be available in such cases, though businesses are still entitled to avail and utilise ITC in the normal course.[1] This creates a situation of temporary working capital blockage, as accumulated credit cannot be immediately liquidated through refunds. While the credit will eventually offset future tax liabilities, businesses, must plan cash flow carefully to navigate this short-term strain.
Operationalisation of GSTAT
The Council has also fast-tracked the long-delayed Goods and Services Tax Appellate Tribunal (“GSTAT”), set to accept appeals before the end of September and commence hearings by December 2025. The GSTAT will now serve as the apex forum for fact finding. Still, scepticism remains. A flood of pending appeals awaits the GSTAT, and whether it can dispose of cases speedily will determine whether “justice delayed” finally ceases to be “justice denied.”
Compliance Simplification & Other Substantive Changes in the Act
The Council has announced measures aimed at easing the compliance burden. For instance, automated provisional refunds for zero-rated and inverted duty claims, based on risk algorithms, omit specified place-of-supply for intermediary, simplifying post-sale discount by removing the earlier requirement that they be pre-agreed and invoice-linked. All these steps would definitely lower the cost of operation and simplify compliance under GST.
Looking Ahead: GST 2.0
The Council’s decisions represent a balancing act, cheaper essentials for consumers, reduced disputes for businesses, but steeper levies on luxury and sin goods to safeguard revenue. Still, reforms signal a philosophical shift. From a tax seen as cumbersome and litigious, GST is being remodelled into a simpler, technology-driven levy that trusts businesses while protecting consumers. For businesses, the opportunities are clear lower consumer prices, stronger demand, and reduced litigation risk. But challenges persist. Managing ITC reversals, refund dependence, and transitional compliance. Companies that adapt pricing, optimise ITC strategies, and engage with refund reforms early will be best placed to leverage this landmark rationalisation.
For further information, please contact:
S.R. Patnaik, Partner, Cyril Amarchand Mangaldas
sr.patnaik@cyrilshroff.com
[1] Circular No. 135/05/2020-GST.
