GST Simplified - 56th Council Meeting Brings Two-Tier Structure & Trade Relief

The 56th GST Council Meeting introduced sweeping changes focused on rate rationalisation and trade facilitation. Key decisions included a broad restructuring of GST rates on goods and services, with significant reductions on essential items such as packaged food, agricultural machinery, textiles, and consumer durables like air conditioners and televisions. In contrast, higher rates were imposed on “sin goods” such as pan masala, aerated beverages, and luxury items, including high-end cars and motorcycles. The Council also emphasised institutional reforms, announcing that the Goods and Services Tax Appellate Tribunal (GSTAT) will be operational by September 2025 to expedite appeals and reduce pending cases.

On the legal front, the Council issued clarifications on intermediary services and post-sale discounts, while also introducing a new valuation method based on the Retail Sale Price (RSP) for tobacco and similar products. To further facilitate trade, a risk-based system for granting provisional refunds in export and inverted duty structure (IDS) cases was announced, along with simplified GST registration procedures for small businesses and e-commerce suppliers. Additionally, a special ad hoc exemption was granted for the import of an armored sedan for the President of India. Collectively, these measures aim to streamline compliance, resolve long-standing industry concerns, and enhance the overall efficiency of the GST framework.

Overview of Rate Changes

• Goods: Rationalisation implemented across key sectors including food, agriculture, fertilizers, textiles, handicrafts, renewable energy, construction materials, and other essential categories.
• Services: Transport rates streamlined; job work charges rationalised; beauty and wellness services shifted to concessional rates; entertainment and online gaming moved to higher tax slabs; life and health insurance proposed for exemption.

Effective Dates

• 22 September 2025: Rate changes applicable for most goods and services.
• Sin Goods (tobacco, pan masala, gutkha, bidis): Old rates will continue until compensation cess loan obligations are fully discharged.

Institutional Reform - GSTAT

• The Goods and Services Tax Appellate Tribunal (GSTAT) will be operational for appeals by September 2025, with hearings commencing by December 2025.
• A backlog appeals window will remain open until 30 June 2026.
• The Principal Bench will also function as the National Appellate Authority for Advance Ruling (NAAAR).
• Objective: To strengthen dispute resolution and ensure consistency in legal rulings.

Specified Premises Clarification

• Standalone restaurants cannot classify themselves as “specified premises.”
• Such restaurants must continue under 5% GST without ITC, and cannot opt for 18% GST with ITC.

Special Exemptions

• An ad hoc IGST and compensation cess exemption has been granted for the import of a new armoured sedan car by the President’s Secretariat for the President of India.

Other Legal Amendments

• Intermediary Services: Section 13(8)(b) omitted → place of supply now determined by the location of the recipient.
• Post-Sale Discounts: Section 15(3)(b)(i) deleted → to ensure ITC reversal by the recipient, Section 34 amended to refer to Section 15(3)(b) where supply value is reduced through a GST Credit Note.
• RSP-Based Valuation: Introduced for pan masala, gutkha, cigarettes, chewing tobacco, zarda, and similar products.

Measures for Trade Facilitation

• Risk-Based Provisional Refunds (Exports): 90% refund sanction through automated risk checks, effective 1 November 2025.
• Provisional Refunds for Inverted Duty Structure (IDS): Extended to IDS cases from 1 November 2025.
• Refunds on Low-Value Export Consignments: Threshold removed to support small exporters.
• Simplified GST Registration (Small/Low-Risk Businesses): Automated registration within 3 working days for businesses with liability ≤ ₹2.5 lakh/month, effective 1 November 2025.
• Simplified Registration for ECO Suppliers: Enables small sellers on e-commerce platforms to register without multiple state registrations.

GST 2.0 - Sectoral Impact Analysis

A. Food & Beverages

The food and beverages sector witnessed one of the most significant rationalisations under GST 2.0. Essential items such as milk, paneer, and roti have now been fully exempted from GST, providing direct relief to households. On the other hand, luxury and non-essential consumables, including aerated beverages and similar products, will attract a steep 40% GST, aligning them with the category of de-merit goods. This dual approach not only reduces the financial burden on daily consumption but also acts as a policy tool to discourage unhealthy and luxury consumption patterns.

Impact

The sweeping rate reductions are expected to ease household expenditure and help resolve long-standing inverted duty structure issues in the food and beverages sector. However, the imposition of a steep 40% slab on aerated beverages, caffeinated drinks, and pan masala underscores a clear public health and revenue-driven stance. For businesses, this transition may pose challenges related to pricing strategies, labelling adjustments, and inventory management during the changeover.

B. Agriculture & Fertilisers

The agriculture sector has been given a strong push under GST 2.0. Agricultural machinery, irrigation equipment, and tractors now attract a reduced 5% GST rate, promoting rural mechanisation and farm efficiency. In addition, fertiliser inputs and bio-pesticides have also seen rate cuts, directly addressing cost pressures for farmers and supporting sustainable agricultural practices.

Impact

The reduction of GST on tractors, farm machinery, irrigation equipment, and fertiliser inputs is expected to significantly lower input costs and promote mechanisation in the agricultural sector. Bringing bio-pesticides and micronutrients under the 5% GST slab also encourages sustainable farming practices. Together, these measures address long-standing industry demands and are likely to help ease rural inflationary pressures.

C. Textiles & Footwear

The textiles and footwear sector has received targeted relief under GST 2.0. Inputs such as synthetic yarns and technical textiles have been reduced to 5%, helping to resolve inverted duty structure challenges. In the finished goods segment, footwear and garments priced up to ₹2,500 are now taxed at a concessional 5% rate, making them more affordable for consumers. However, luxury apparel and high-end footwear will attract a higher 18% GST, maintaining a distinction between essential and premium consumption.

Impact: Rate cuts for yarns, technical textiles, and low-value apparel resolve inverted duty structures and provide relief to MSMEs and exporters. However, the hike to 18% for garments above ₹2,500 could hurt consumer demand in the premium retail segment, create classification disputes, and complicate inventory and MRP management for retailers.

D. Healthcare & Pharma

Healthcare goods saw sweeping relief, with 36 life-saving drugs fully exempted and diagnostic kits reduced to 5%. However, exemptions may create ITC blockage, raising concerns over input costs for hospitals and pharmacies.

Impact

The exemption of 36 life-saving drugs and the reduction of GST on diagnostic kits and medicaments are expected to improve affordability and access to healthcare for the public. However, full exemptions result in Input Tax Credit (ITC) blockages, which could increase costs for hospitals, distributors, and supply chains. Additionally, the sector faces transitional challenges, as inventories purchased at higher tax rates will now need to be sold at lower rates, potentially leading to valuation and pricing issues.

E. Automobiles & Mobility

The automobile sector has witnessed major rationalisation under GST 2.0. To address long-standing classification disputes, GST on most vehicles has been reduced from 28% to 18%, providing relief to consumers and manufacturers alike. At the same time, luxury cars, SUVs, yachts, and personal aircraft have been placed in the 40% GST slab, ensuring that high-end consumption continues to attract a premium tax. This dual approach strikes a balance between affordability for mass mobility and revenue generation from luxury consumption.

Impact: Reducing GST to 18% on most passenger and commercial vehicles addresses classification disputes and lowers overall ownership costs. By contrast, luxury cars, SUVs, and motorcycles above 350cc now fall in the 40% slab, which could suppress demand in the premium segment. Relief for EVs and fuel-cell vehicles reinforces the government’s push for sustainable mobility.

GST on Cars - What Buyers Need to Know (56th GST Council Update)

The 56th GST Council Meeting did not reduce GST on cars, SUVs, or luxury vehicles. These items continue to attract 28% GST plus Compensation Cess, which has been extended until March 31, 2026.

Current Tax Structure

• Small Cars: Petrol cars up to 1200 cc or diesel cars up to 1500 cc, and with a length of up to four metres - Nil cess.
• Mid-size SUVs: Petrol cars above 1200 cc or diesel cars above 1500 cc, with a length exceeding four metres and ground clearance of 170 mm or more - 15% to 22% cess in addition to 28% GST.
• Luxury Cars: Continue to attract 20% to 22% cess plus 28% GST, making the total tax burden nearly 50% or more.

Key Point

Even though GST rates on most goods and services were rationalised into 5% and 18% slabs, cars remain outside this reform and are still treated as luxury or de-merit goods.

Future Outlook

The Compensation Cess will continue until March 31, 2026. After this, the Council may restructure rates, but cars are more likely to be moved into a 40% de-merit slab rather than into the lower 18% slab.

Conclusion for Car Buyers

Car buyers which attract CESS will not get immediate GST relief. Waiting for a major tax cut on cars may not be beneficial, as the government continues to treat them as luxury/de-merit goods, keeping them in the highest tax bracket.

F. Construction & Infrastructure

Cement has been reduced from 28% to 18%, easing cost burdens on housing and infrastructure. Marble, granite, and certain particle boards are cut to 5%. 

Impact: Cutting GST on cement and building materials from 28% to 18% is a significant relief for developers, lowering project costs and improving affordability in housing. However, raising GST on works contract services for government projects may escalate infrastructure costs, creating budgetary challenges for the public sector.

G. Energy Sector

Coal has been increased to 18% to discourage dependence on fossil fuels, while renewable devices like solar cookers, solar water heaters, and windmills are cut to 5%, signalling policy shift toward clean energy.

Impact: The GST hike on coal from 5% to 18% addresses the issue of inverted duty accumulation in the mining sector but significantly raises costs for industries dependent on coal, such as power, cement, and steel. These costs are likely to be passed on to end consumers. On the other hand, reducing GST to 5% on renewable energy devices and equipment improves project viability, lowers capital costs, and signals a strong policy shift towards accelerating clean energy adoption in line with India’s climate commitments.

H. Consumer Durables & Electronics

To make essential appliances more accessible, GST on ACs, TVs, and dishwashers has been reduced from 28% to 18%. Communication devices for defense/police also see relief.

Impact: The reduction of GST from 28% to 18% on consumer appliances such as air-conditioners, televisions, and dishwashers enhances affordability and is expected to drive demand, particularly during the festive season. This move also eases working capital pressures for manufacturers and distributors. Relief on communication devices used by defense and police strengthens public infrastructure and enhances security readiness. Overall, the measures are poised to boost consumption, support domestic manufacturing, and expand access to essential household technologies.

I. Transport Services

The GST Council has rationalised transport rates into a clear two-slab structure of 5% without ITC and 18% with ITC. Passenger and goods transport options have been streamlined, providing businesses flexibility in choosing credit-linked or concessional rates.

Impact: The rationalisation brings clarity and flexibility but increases cost under the ITC-eligible option. Logistics providers and transport operators will need to carefully evaluate whether to operate under the concessional 5% scheme or the 18% credit-linked structure depending on their client profiles.

J. Insurance

The Council has proposed major relief for insurance services by exempting life and health insurance, while reducing the GST rate for third-party motor insurance.

Impact: Exemptions on life and health insurance will make coverage more affordable, supporting higher insurance penetration. However, exemption leads to ITC blockage for insurers. The reduction on third-party motor insurance premiums benefits the logistics and transport sector by lowering compliance costs.

K. Restaurants (Specified Premises Clarification)

The Council clarified that standalone restaurants cannot classify as “specified premises.” They will continue to be taxed at 5% without ITC.

Impact: This clarification prevents misclassification and ensures uniformity. However, since ITC remains blocked, standalone restaurants continue to absorb tax costs on inputs, even though customers benefit from lower tax outgo.

L. Job Work Services

Rates have been rationalised to support specific industries while increasing the levy for generic job work.

Impact: The rationalisation reduces costs for sectors such as pharma, printing, and leather, helping MSMEs. However, the higher 18% levy on generic job work may burden smaller players outside these specified industries, increasing compliance and cash flow challenges.

Applicability of Rates on Transition (Section 14)

Note:

• Date of payment is the earlier of entry in supplier’s books or credit in bank account.
• If bank credit occurs after 4 working days from invoice date, then actual bank credit date is treated as the date of payment.

Reference to Annexure

For ease of reference and implementation, a comprehensive sector-wise and HSN-wise tabulation of all GST rate changes, exemptions, and ITC conditions is provided in the annexure. This detailed mapping ensures greater clarity for stakeholders across industries, enabling accurate classification, invoicing, and compliance planning.

Conclusion

The 56th GST Council’s recommendations mark a pivotal recalibration of India’s indirect tax framework, striking a balance between fiscal prudence and sectoral stimulus. By rationalising rates, expanding exemptions, and clarifying ITC eligibility, the Council has addressed long-standing industry concerns while paving the way for smoother compliance and broader economic inclusivity. These reforms are not merely a matter of adjusting numbers; they represent a strategic shift toward harmonised taxation, enhanced sectoral competitiveness, and transparent governance.

Annexure

Sector-wise GST Rate Rationalisation on Goods and Services (with HSN / SAC Codes)