The 56th GST Council Meeting has introduced sweeping reforms effective from 22 September 2025, reducing GST rates on more than 175 items and shifting most goods into the 5% and 18% slabs. Many essentials have also been moved to the exempt category. While these measures provide direct relief to end-consumers, businesses need to carefully handle Input Tax Credit (ITC) during this transition. Failure to comply with the transitional provisions may not only block working capital but could also trigger departmental scrutiny, interest, penalty, and litigation.
The Central Board of Indirect Taxes and Customs (CBIC), along with the GST Council, has issued FAQs and clarifications to guide taxpayers. It has been made clear that the revised GST rates apply from 22 September 2025 onwards to all goods and services except for certain tobacco products, where the existing rates and compensation cess will continue. Importantly, there is no change in the registration threshold under the CGST Act. However, taxpayers must start charging GST at the revised rates from the effective date, and in cases where goods are moved to exemption or nil-rated categories, ITC relating to such supplies must be reversed as per Rule 42/43 of the CGST Rules.
One of the most critical clarifications issued is that refund of ITC is not available merely because of a rate reduction. Refunds will only be admissible in two situations: (a) zero-rated supplies such as exports, and (b) in cases of inverted duty structure where the government has specifically notified refund eligibility. This principle has been upheld by courts as well, most notably in the Supreme Court’s decision in Union of India v. VKC Footsteps India Pvt. Ltd. (2021), where it was held that refund of ITC is a statutory right and limited strictly to the circumstances provided in Section 54(3) of the CGST Act. The Court reiterated that ITC itself is a concession, not a vested right, echoing its earlier views in Jayam & Co. v. State of Tamil Nadu and ALD Automotive Pvt. Ltd. v. CTO.
To understand the implications, consider the case of a packaged food manufacturer. If the manufacturer had purchased raw materials taxed at 12% before 21 September 2025, the ITC would be fully available. However, if the finished product attracts only 5% GST from 22 September onwards, the manufacturer can set off ITC only against the reduced output liability. Any excess ITC would remain unutilized but can be carried forward for use in the future. If, however, the finished product becomes fully exempt, the ITC attributable to such goods would have to be reversed immediately, and no refund can be claimed. This aligns with the settled position in departmental circulars such as CBIC Circular No. 135/05/2020-GST dated 31 March 2020, which clarified that refund of ITC cannot be claimed in cases of rate reduction.
From a compliance standpoint, businesses need to adopt practical strategies to minimize ITC blockage and safeguard themselves from litigation. Many enterprises are already segregating stock held as of 21 September 2025 to identify the quantum of ITC that may not be fully utilizable. Some are aligning procurement cycles to avoid carrying excess high-ITC inventory into the new rate regime. Others are upgrading ERP and accounting systems to automatically compute reversals under Rule 42/43 and generate reconciliation reports that can be readily produced during audits. Documentation plays a central role here; working papers, reconciliation statements, and sector-wise ITC summaries should be prepared and preserved as evidence of compliance.
The legal implications of failing to properly manage ITC during this transition are serious. Incorrectly carrying forward ineligible ITC, or failing to reverse credits for exempt supplies, may lead to demands under Sections 73 and 74 of the CGST Act, along with interest under Section 50 and penalties. The risk is particularly high in inventory-heavy sectors such as pharmaceuticals, healthcare, FMCG, and consumer durables, where the transition affects large volumes of goods.
In conclusion, while the 56th Council’s rationalization represents a major simplification of the GST structure and will ease the tax burden on consumers, it also creates a complex compliance challenge for industry. Businesses must remember three key principles: first, excess ITC due to rate cuts can only be carried forward, not refunded; second, ITC relating to exempt goods must be reversed immediately; and third, robust documentation and system preparedness are essential to defend against departmental scrutiny. With judicial precedents, CBIC circulars, and FAQs all pointing to the same direction, industries should act proactively by seeking professional guidance and putting in place a structured ITC management framework. This will not only ensure compliance but also provide a safeguard against avoidable disputes in the evolving GST 2.0 era
( the views expressed in this article are strictly personal the author of this article can be reached at caprudhvigst@gmail.com)
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