GST Applicability on Exercise Book Paper – Challenges and Practical Concerns after the 22nd September Amendments
A: Introduction
The GST Council has recently notified changes in the rate of GST on paper through Notification No. 9/2025–Central Tax (Rate) and Notification No. 10/2025–Central Tax (Rate), effective from 22nd September 2025. These amendments create differential treatment for the same paper depending on its usage, which raises several practical and compliance concerns for suppliers and buyers in the paper trade.
B: Revised GST Rates on Paper
- Paper for Writing & Printing – Taxable at 18% GST
- Paper (same Paper) used for Exercise Books – Nil-rated (0%)
- Exercise Books – Nil Rated (0%)
This revision on rates (specially for Paper used for Exercise Book) attempts to provide relief for the education sector by exempting exercise books, but in practice, it creates complications due to usage-based taxability.
C: Practical Issues in Usage-Based Taxability
- Uncertainty at Vendor’s End
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- A vendor selling paper may not know the ultimate usage of the buyer at the time of sale; leading to confusion in regard to chargeability of tax rate.
- The buyer may declare intended usage as “for exercise book manufacturing” to avail Nil rating, but may later divert the paper for taxable use.
- This opens avenues for misreporting or disputes during departmental audits.
- Procedure and precautions to be taken by vendor at the time of making supplies
- At times, the buyer may not be in position to state its end usage at the time of purchase. Say, a distributor purchasing goods from manufacturer would never know where the paper shall be used at the time of purchase.
- Compliance Burden
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- The vendor cannot verify the actual end-use, making correct classification almost impractical.
- Separate invoicing and record-keeping for the same item, based on its end-use, adds compliance complexity.
D: Impact on Input Tax Credit (ITC)
- No Credit for Exempt Supplies
Subsection (2) of Section 17 of the CGST Act, 2017 restricts the availment of Input Tax Credit (ITC) on goods or services used for making exempt supplies. As per clause (47) of Section 2 of the CGST Act, 2017, nil-rated supplies are treated as exempt supplies. Accordingly, where paper is supplied for the manufacture of exercise books (nil-rated), the supplier (vendor) cannot claim ITC on the related inputs or capital goods.
- Inputs on Common Raw Materials and Capital Goods
Common inputs shall be proportionately allowed as ITC to the extent they are used in the supply of taxable goods. Reversal of ITC is required to be carried out in proportion to the extent they are used in supply of exempt goods; in accordance with the procedures prescribed under Rules 42 and 43 for inputs and capital goods, respectively. In practice, this calculation is quite challenging, as ITC is availed at the time of purchase of raw materials, whereas the supply of taxable or exempt goods takes place only after their conversion into finished goods over a considerable period of time.
- Reversal/Payment of ITC taken on Goods declared Exempt
Manufacturers and traders of paper used in the production of exercise books will be required to reverse the credits availed on raw materials, semi-finished goods, and finished goods held in stock as on the beginning of 22nd September, in accordance with Subsection (4) of Section 18 of the CGST Act, 2017. This reversal is to be carried out as per Rule 44 of the CGST Rules, 2017. The process is likely to create significant computational challenges, particularly due to the use of common raw materials for both taxable and exempt categories of paper.
- Reversal/Payment of ITC taken on Capital Goods
The manufacturer of paper eligible for exemption will be required to reverse the proportionate credit availed on capital goods in accordance with Section 18(4) of the CGST Act, 2017. These calculations must be made by considering the input tax credit (ITC) claimed over the past 60 quarters in relation to the capital goods used in the production of exempt goods. Although the detailed provisions are not being discussed herein, arriving at the exact figure will also pose significant practical challenges.
E: Consequences
- Distorted Costing
– If paper is sold at Nil%, vendors are denied ITC on inputs (raw material, capital goods, and expenses).
– This increases the cost of such supplies, since embedded GST becomes part of cost.
– Conversely, when the same paper is sold charging 18% GST, ITC is available, reducing the cost burden.
- Higher Cost of Exempt Final Products
– Exercise books, though Nil-rated, will be made from paper purchased at higher prices (due to ITC block).
– This defeats the purpose of making exercise books cheaper for the end consumer, as the cost is indirectly passed on.
– Thus, the same paper, purely on usage-based distinction, has different landing costs, leading to market distortion and cascading effect.
- Probability of Import goods becoming Cheaper
Although the realtime calculations are yet to be analysed but there is considerable probability that the Imported Paper for the purpose of manufacturing Exercise Books may become cheaper.
F: Summary and Conclusion
| Particulars | Paper for Writing and Printing | Paper for Exercise Books |
| GST Rate | Revised to 18% from 12% | Revised to Nil from 12% |
| Nature of Supply | Taxable | Exempt (Nil) |
| ITC on Inputs / Capital Goods | Allowed | Not Allowed
(Need reversal if availed on Stock and Capital Goods) |
| Vendor’s Cost Impact | Lower effective Cost as ITC is available | Higher effective cost as ITC is blocked and GST paid for Raw Materials & Expenses becomes part of the cost. |
While the intent behind exempting exercise books is welfare-oriented, the usage-based GST classification on paper is impractical. It not only creates compliance challenges for suppliers but also results in higher costs for exempt products due to denial of ITC under Section 17(2) coupled with transitional provisions of Section 18(4) of CGST Act, 2017. The Exercise Books may be subject to Nil rate of GST from existing 12% but it is unlikely that the rate of Exercise Books shall be reduced drastically as is intended.
Various paper industry associations have expressed reservations about the proposed change, citing concerns over potential disruptions in the pricing calculation mechanism.
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Disclaimer:
The opinion given in article is as per interpretational understanding of the author which is subject to correctness. The author has largely concentrated on the GST on Paper to be used for manufacture of Exercise book. The author’s firm may be serving few of its services to paper manufacturing units or paper distributors. The article is intended for academic discussion and should not be relied without seeking further legal advices and opinions from legal consultants.
Articled by: CA. Aditya Kumar Maheshwari aditya@adityaca.com
Author Bio
hello sir,
you have mentions nature of supply as exempt . can you clarify why it is exmpt and not nil rated… also you mean there are not goods under nilrated nature of supply after 22 sep changes