Library / Goods and Services Tax: The Professional's Master Guide
3. GST 2.0 and Recent Reforms (2025 to 2026)
The period from 2024 to 2026 brought the largest set of changes since 2017. The rate structure was rewritten, compensation cess came to an end, the returns system moved to tighter matching, and the appellate tribunal finally started work. This chapter summarises these changes. Later chapters deal with each area in detail.
3.1 The rate rationalisation of 22 September 2025
The 56th meeting of the GST Council on 3 September 2025 recommended what is commonly called GST 2.0. The changes took effect from 22 September 2025. The four-slab structure of 5%, 12%, 18% and 28% gave way to two main rates: 5% (merit rate) and 18% (standard rate), with a 40% rate for a small list of demerit and luxury goods and services. Most items at 12% moved to 5%, and most items at 28% moved to 18%. Special rates continue: nil, 0.25% for rough precious stones, 1.5% for cut and polished diamonds, 3% for gold, silver and jewellery, 0.1% for supplies to merchant exporters, and 1% and 5% for residential real estate.
The table shows the main movements for goods.
Goods | Earlier rate | From 22 September 2025 |
|---|---|---|
UHT milk, pre-packaged paneer, Indian breads (chapati, roti, paratha) | 5% or 18% | Nil |
33 life-saving drugs | 12% (some 5%) | Nil |
Hair oil, soap, toothpaste and similar toiletries | 18% | 5% |
Many packaged foods (namkeen, butter, ghee, sauces and similar) | 12% or 18% | 5% |
Bicycles, tractors and farm machinery, solar devices | 12% | 5% |
Man-made fibre and man-made yarn | 18% and 12% | 5% |
Cement, air conditioners, televisions | 28% | 18% |
Small cars (petrol up to 1200cc, diesel up to 1500cc, length up to 4 m) | 28% plus cess | 18% |
Motorcycles up to 350cc, buses and trucks | 28% | 18% |
Larger cars and motorcycles above 350cc | 28% plus cess | 40% (no cess) |
Aerated sugary drinks and caffeinated beverages | 28% plus 12% cess | 40% |
Gold, silver and jewellery | 3% | 3% (unchanged) |
The main changes for services are set out below.
Service | Earlier position | From 22 September 2025 |
|---|---|---|
Hotel accommodation up to Rs. 7,500 per unit per day | 12% with ITC | 5% without ITC |
Hotel accommodation above Rs. 7,500 | 18% with ITC | 18% with ITC |
Restaurant service | 5% without ITC | 5% without ITC; 18% with ITC in specified premises |
Beauty and wellness (salons, gyms, yoga centres) | 18% with ITC | 5% without ITC |
Individual life and health insurance, and their reinsurance | 18% | Exempt |
GTA, multimodal transport, goods carriage with operator | 5% without ITC or 12% with ITC | 5% without ITC or 18% with ITC |
Passenger transport by motor vehicle | 5% without ITC or 12% with ITC | 5% without ITC or 18% with ITC |
Air travel other than economy class | 12% | 18% |
Cinema tickets up to Rs. 100 | 12% | 5% |
Casinos, race clubs, betting, lottery, online money gaming, IPL-type events | 28% | 40% |
Job work for specified items (pharma, leather, printing, bricks, umbrellas) is at 5% and other job work at 18%. Leasing of goods without an operator follows the rate of the goods. Most works contract services, including those supplied to Government, are at 18%; check the specific entry before applying a lower rate. Local delivery services through an e-commerce operator, where the delivery person is unregistered, are taxed in the hands of the operator at 18% under section 9(5).
Illustration 8: Effect of the rate cut on the consumer price A dealer in Ahmedabad sells a 43-inch television with a value of Rs. 40,000, and a petrol small car with an ex-showroom value of Rs. 6,00,000. Step 1 (television): Before 22 September 2025 at 28%: Rs. 40,000 + Rs. 11,200 = Rs. 51,200. After at 18%: Rs. 40,000 + Rs. 7,200 = Rs. 47,200. Saving Rs. 4,000, or 7.81% of the old price. Step 2 (small car): Before at 28% GST plus 1% cess = 29%: tax Rs. 1,74,000, price Rs. 7,74,000. After at 18%: tax Rs. 1,08,000, price Rs. 7,08,000. Saving Rs. 66,000, or 8.53% of the old price. Result: If the base value is unchanged, the full benefit reaches the buyer. Anti-profiteering proceedings under section 171 are no longer available for new complaints (sunset from 1 April 2025), but the Government monitored prices after GST 2.0 and dealers should keep price lists that show the base value was not raised. |
Stock in hand on the date of change
A rate cut does not require the dealer to reverse ITC already taken at the old rate. The goods remain taxable, so section 17(2) does not apply. The dealer may end up with more ITC than output tax on that stock, which is carried forward in the electronic credit ledger. CBIC's view (Circular 135/05/2020) is that no refund under the inverted duty route is available where the input and the output are the same goods and the accumulation arises only from a rate cut. The Legal Metrology authorities allowed revised retail prices to be declared on unsold packages for a limited period.
Illustration 9: Stock held on 21 September 2025 Cool Air Traders, Surat, had 20 air conditioners in stock on 21 September 2025, bought at Rs. 30,000 each plus GST at 28%. It sold all of them in October 2025 at Rs. 36,000 each. Step 1: ITC already taken = 20 x Rs. 30,000 x 28% = Rs. 1,68,000. Step 2: Output tax at 18% = 20 x Rs. 36,000 x 18% = Rs. 1,29,600 (CGST Rs. 64,800 + SGST Rs. 64,800). Step 3: Excess ITC on this stock = Rs. 1,68,000 minus Rs. 1,29,600 = Rs. 38,400. Result: No reversal is required. The Rs. 38,400 stays in the credit ledger and is used against future output tax. It is not refundable as inverted duty, since the input and the output are the same goods. |
Where a supply becomes exempt
The position is different where an output becomes exempt. ITC is not available on inputs and input services used for exempt supplies (section 17(2) read with rules 42 and 43). A business that makes only exempt supplies after the change must also reverse ITC on stock and capital goods under section 18(4). The clearest case is an insurer: from 22 September 2025, individual life and health insurance policies are exempt, while group policies and general insurance remain taxable. Commission to agents on individual policies continues to be taxed under reverse charge, and the ITC on it is lost.
Illustration 10: ITC reversal by a health insurer Suraksha Health Insurance Ltd. has, in October 2025, taxable premium (group health and other taxable policies) of Rs. 6,00,00,000 and exempt premium on individual health policies of Rs. 4,00,00,000. Common ITC (rent, IT services, advertising) is Rs. 50,00,000. RCM tax of Rs. 9,00,000 was paid on commission to agents for individual policies only. Step 1: Exempt share of total premium = Rs. 4,00,00,000 / Rs. 10,00,00,000 = 40%. Step 2: Common ITC to be reversed under rule 42 = 40% of Rs. 50,00,000 = Rs. 20,00,000 (CGST Rs. 10,00,000 + SGST Rs. 10,00,000). Step 3: ITC of Rs. 9,00,000 on agents' commission is used wholly for exempt supplies and is not available at all. Result: ITC lost in the month = Rs. 29,00,000. The exemption lowered the policyholder's premium but raised the insurer's cost, which is why the pricing of these policies was revised after September 2025. |
Invoices raised around the date of change
Where goods or services are supplied close to the date of a rate change, section 14 of the CGST Act decides whether the old or new rate applies. It looks at three events: date of supply, date of invoice and date of receipt of payment. If two of the three events fall after the change, the new rate generally applies; if two fall before, the old rate applies. The detailed rules are in the chapter on time of supply.
Illustration 11: Cement supplied around 22 September 2025 Rathod Cement Traders supplies cement worth Rs. 5,00,000 in each case. The rate fell from 28% to 18% on 22 September 2025. Case A: Supply and invoice on 19 September 2025, payment on 30 September 2025. Supply before the change, invoice before, payment after. The time of supply is the date of invoice. Old rate 28% applies: tax Rs. 1,40,000. Case B: Advance received on 10 September 2025, supply and invoice on 24 September 2025. Supply after the change, payment before, invoice after. The time of supply is the date of invoice. New rate 18% applies: tax Rs. 90,000. Result: Getting the event dates wrong changes the tax by Rs. 50,000 on each consignment. |
3.2 End of compensation cess and the tobacco regime
Compensation cess was removed on all goods other than tobacco and related products from 22 September 2025, and its incidence was folded into the new rates. That is why larger cars moved to 40% with no cess. For tobacco and pan masala, cess continued until the loans taken for compensation were repaid. From 1 February 2026 compensation cess ended on these goods too. Tobacco products and pan masala now attract GST at 40% (bidis at 18%), and the value of specified tobacco products is determined on the basis of retail sale price. At the same time, a central excise duty on tobacco and the Health Security se National Security Cess on pan masala manufacturing capacity came into force. Tobacco manufacturers therefore now deal with GST, central excise and the new cess together.
Key point Balances of compensation cess credit lying unused on the date the cess was removed, particularly with automobile dealers, could not be set off against GST. Check the latest CBIC clarification before advising on any claim for such balances. |
3.3 Finance Act, 2025 amendments
Most GST amendments made by the Finance Act, 2025 came into force on 1 October 2025. Some were retrospective. The table gives the status as on 28 September 2026.
Provision | Change | Status |
|---|---|---|
Section 17(5)(d) | Words "plant or machinery" replaced by "plant and machinery" to undo Safari Retreats | In force, retrospective from 1 July 2017 |
Sections 2(61) and 20 | ISD to distribute tax paid under reverse charge, including IGST on inter-State RCM | In force (from 1 April 2025) |
Sections 12(4) and 13(4) | Time of supply provisions for vouchers omitted | In force |
Section 34(2) | Supplier can reduce output tax on a credit note only if recipient has reversed ITC | In force |
Sections 38 and 39 | GSTR-2B regenerated through IMS; conditions for filing returns | In force |
Sections 107(6), 112(8) | 10% pre-deposit for penalty-only appeals | In force from 1 October 2025 (held prospective) |
Sections 148A, 122B | Track and trace marking on notified goods; penalty Rs. 1 lakh or 10% of tax, whichever higher | In force; applies to goods as notified |
Schedule III para 8(a) | Covers goods warehoused in SEZ or FTWZ sold before clearance for export or DTA | In force, retrospective from 1 July 2017; no refund of tax already collected |
Judicial view: Why section 17(5)(d) was amended Safari Retreats (P) Ltd. v. Chief Commissioner of CGST (Supreme Court, 2024): The Court upheld the validity of section 17(5)(c) and (d), but held that the words "plant or machinery" in clause (d) are different from "plant and machinery" defined in the Explanation. Whether a building, such as a mall let out on rent, is a "plant" had to be decided on a functionality test on the facts of each case. If it was a plant, ITC on its construction would not be blocked. Practical relevance: The Finance Act, 2025 replaced "plant or machinery" with "plant and machinery" retrospectively from 1 July 2017, so the functionality test no longer opens the door to ITC on buildings. Claims made on the strength of Safari Retreats need to be reviewed; the retrospective amendment itself may be challenged, and practitioners should watch for litigation on that point. |
3.4 Finance Act, 2026 amendments
The Finance Act, 2026 was enacted on 30 March 2026. Two amendments are in force and two are enacted but await notification. The distinction matters: until a provision is notified, the old law continues to apply.
Provision | Change | Status on 28 September 2026 |
|---|---|---|
Section 13(8)(b), IGST Act | Omitted: place of supply of intermediary services is now the location of the recipient under section 13(2). Indian intermediaries serving foreign clients can qualify as exporters if section 2(6) conditions are met | In force from 30 March 2026 |
Section 101A(1A), CGST Act | Existing authority (including GSTAT) may hear appeals under section 101B until NAAAR is constituted | In force from 1 April 2026 |
Sections 15(3)(b) and 34 | Post-sale discounts can be excluded from value through credit notes where recipient reverses ITC, without a prior agreement linked to invoices | Enacted, not yet notified |
Section 54 | 90% provisional refund extended to inverted duty refunds; Rs. 1,000 minimum removed for export refunds with payment of tax | Enacted, not yet notified; CBIC grants 90% provisionally on a risk basis meanwhile |
Illustration 12: Year-end discount under the present law Om Distributors receives a year-end turnover discount of 2% on purchases of Rs. 50,00,000 from Bhavani Foods Ltd. The discount was announced after the year ended and was not agreed in any contract before the supplies. Step 1: Discount = 2% of Rs. 50,00,000 = Rs. 1,00,000. Step 2: Under section 15(3)(b) as it stands today, a post-supply discount reduces value only if it was agreed before or at the time of supply and is linked to specific invoices. That condition is not met. Step 3: Bhavani Foods may issue a financial credit note for Rs. 1,00,000 without GST. Its output tax (Rs. 18,000 at 18%) is not reduced. Result: Once the Finance Act, 2026 amendment is notified, Bhavani Foods could issue a GST credit note and reduce its tax by Rs. 18,000, provided Om Distributors reverses ITC of Rs. 18,000. Until then, the old rule applies. |
3.5 Returns and matching: IMS, hard lock and the three-year bar
- Invoice Management System (IMS), from 1 October 2024: the recipient can accept, reject or keep pending each inward invoice. No action means deemed acceptance. From the October 2025 tax period, "pending" is allowed for one tax period only for most records, and the recipient declares the amount of ITC reversed against a credit note (full or partial). GSTR-2B reflects these actions.
- GSTR-3B hard lock: from the July 2025 period, the liability in Table 3 of GSTR-3B is auto-populated from GSTR-1, GSTR-1A or IFF and cannot be edited. Errors must be corrected through GSTR-1A before filing GSTR-3B.
- Three-year bar: a return (GSTR-1, 3B, 4, 5, 6, 7, 8 or 9) cannot be filed after three years from its due date. The portal enforces this from the July 2025 period. Old non-filers lose the chance to regularise through returns.
Illustration 13: Credit note after the section 34(2) amendment Jain Electricals issues a credit note to Verma Builders for goods returned: value Rs. 1,00,000 plus GST at 18% = Rs. 18,000. Verma Builders had availed full ITC on the original invoice. Step 1: Verma Builders accepts the credit note in IMS and declares reversal of Rs. 18,000. Step 2: Jain Electricals can then reduce its output tax by Rs. 18,000 in its return. Result: If Verma Builders keeps the credit note pending or rejects it, Jain Electricals cannot reduce its tax until the recipient acts. Suppliers should follow up with customers on credit notes before the return is filed. |
3.6 GSTAT and what to watch
The Goods and Services Tax Appellate Tribunal is now working. E-filing of appeals began on 24 September 2025, the Principal Bench at New Delhi is functioning, and 31 State benches have been notified. A notification of 30 June 2026 fixed 31 July 2026 as the last date for appeals against orders communicated before 1 May 2026; for later orders the normal three months applies. The appeals chapter covers pre-deposit and procedure.
The 57th meeting of the GST Council is scheduled for October 2026 and is expected to focus on process reforms. Nothing from that meeting is reflected in this edition. Readers should check its outcome, and the notification status of the Finance Act, 2026 amendments, before relying on this chapter.
Chapter summary • GST 2.0 (22 September 2025) moved to 5% and 18% as main rates, with 40% for demerit and luxury items; 12% and 28% largely removed. • A rate cut does not require ITC reversal on stock; accumulation from a rate cut on the same goods is not refundable as inverted duty. • Where an output becomes exempt (for example individual health insurance), ITC must be reversed under section 17(2) and rules 42 and 43. • Compensation cess ended on most goods from 22 September 2025 and on tobacco from 1 February 2026; tobacco and pan masala now attract 40% GST. • Finance Act, 2025: retrospective 17(5)(d) and Schedule III changes, ISD for RCM, credit note condition, IMS, penalty pre-deposit, track and trace. • Finance Act, 2026: intermediary place of supply changed and interim NAAAR in force; post-sale discount and refund amendments not yet notified. • IMS, GSTR-3B hard lock and the three-year bar make timely and accurate returns more important than ever; GSTAT is now operational. |
© Vipin Nair. This guide is for reading online only. Copying, downloading, printing and redistribution are not permitted. For study and general reference; not legal, tax or investment advice.