GST Council 56th Meeting: Tax Rate & Reforms

Landmark ‘Next-Gen’ GST Reforms: Unpacking the 56th GST Council Meeting Recommendations.

Introduction

The 56th Meeting of GST Council, held on September 3, 2025, in New Delhi, has been hailed as a watershed moment in India’s tax reform journey. Chaired by the Union Finance Minister, Smt. Nirmala Sitharaman, the council has approved a series of “Next-Gen” GST reforms aimed at simplifying the tax framework, rationalizing rates, and significantly easing the compliance burden for citizens and businesses alike.

These reforms, announced in line with the Prime Minister’s vision from the Red Fort, represent a strategic and citizen-centric evolution of GST. The recommendations are set to be implemented in a phased manner, with the majority of changes taking effect from September 22, 2025.

Here’s a detailed breakdown of the key recommendations and their implications:

1.A Simplified Tax Rate Structure: Moving to a ‘Simple Tax’ Regime

The most significant reform is the rationalization of the existing 4-tiered tax structure into a citizen-friendly ‘Simple Tax’ regime. This new structure will primarily consist of two rates:

• Merit Rate of 5%: For essential goods and services.
• Standard Rate of 18%: For most other goods and services.
• A special de-merit rate of 40%: A select few luxury and sin goods will be taxed at this rate.

This move simplifies the tax landscape, reduces classification disputes, and provides clarity for both taxpayers and consumers.

2. Major Rate Reductions for the Common Man, Farmers, and Industry

The council has approved extensive rate rationalization with a focus on providing relief to individuals, labor-intensive industries, and key sectors of the economy. Some of the most impactful changes include:

• Daily Use Items: GST on a wide range of common household items like hair oil, soap, shampoos, toothpaste, bicycles, and kitchenware will be reduced from 12% or 18% to a single 5% rate.
• Food Items: Packaged food products such as namkeens, bhujia, pasta, instant noodles, butter, and ghee will now be taxed at 5%, down from 12% or 18%.
• Essential Foods: GST on Ultra-High Temperature (UHT) milk, prepackaged paneer, and all Indian breads (like chapati, roti, paratha) has been reduced from 5% to NIL.
• Healthcare: A landmark decision has been made to exempt all individual life and health insurance policies (including family floater and senior citizen policies) from GST, making insurance more affordable. Furthermore, 33 life-saving drugs and medicines will have their GST reduced from 12% to NIL, and 3 other life-saving drugs for severe diseases from 5% to NIL. All other drugs will see a reduction from 12% to 5%.
• Consumer Durables: GST on air-conditioning machines, TVs up to 32 inches, and dishwashing machines has been reduced from 28% to 18%.
• Automobiles: Small cars and motorcycles with an engine capacity equal to or less than 350cc, along with buses and trucks, will see their GST reduced from 28% to 18%.
• Other Sectors:
  • Agriculture: Tractors and various agricultural machinery will be taxed at 5% instead of 12%.
  • Labor-intensive industries: Handicrafts, marble and granite blocks, and intermediate leather goods will also see a reduction from 12% to 5%.
  • Cement: The GST on cement has been brought down from 28% to 18%.
  • Renewable Energy: GST on renewable energy devices and their parts has been reduced from 12% to 5%.

3. Correction of Inverted Duty Structure

To resolve long-pending issues and promote domestic manufacturing, the GST Council has corrected the inverted duty structure in several sectors:

• Manmade Textiles: GST on manmade fiber and yarn has been reduced from 18% and 12% respectively to a uniform 5%.
• Fertilizers: GST on key raw materials like Sulphuric acid, Nitric acid, and Ammonia has been reduced from 18% to 5%.

4. Major Process and Procedural Reforms

Beyond rate changes, the council has recommended crucial procedural reforms to enhance the ease of doing business:

• Operationalization of GSTAT: The Goods and Services Tax Appellate Tribunal (GSTAT) will be operationalized, with appeals to be accepted before the end of September 2025 and hearings to commence before the end of December 2025. A limitation date of June 30, 2026, has been set for filing of backlog appeals. This will provide a robust mechanism for dispute resolution.
• Simplified Registration: An optional simplified GST registration scheme will be introduced for small and low-risk businesses, providing automated approval within three working days.
• Faster Refunds: The council has recommended a system-driven, risk-based provisional sanction of 90% of refund claims for both zero-rated supplies and cases with an inverted duty structure. This will significantly improve liquidity for exporters and manufacturers.
• Post-Sale Discounts: The complex rules for post-sale discounts have been simplified. Discounts can now be granted through a credit note without the need for a pre-existing agreement, and a circular will be issued to provide further clarity on the reversal of ITC.
• Valuation for Tobacco Products: GST on Pan Masala, Gutkha, Cigarettes, and other tobacco products will now be levied on the Retail Sale Price (RSP) instead of the transaction value.

These reforms signify a monumental shift in the GST regime, prioritizing consumer welfare, industry growth, and administrative efficiency. The new ‘Simple Tax’ structure, coupled with targeted rate reductions and crucial process reforms, is set to propel India’s economy forward and reinforce GST’s role as a cornerstone of the nation’s economic progress.

5. Refunds: A Major Leap Towards Automation and Ease of Business

The council has introduced significant reforms to streamline the refund process, particularly for exporters and businesses with an inverted duty structure.

• Risk-Based Provisional Refund: The most impactful change is the move to a system-driven, risk-based provisional refund system. This will be operational from November 1, 2025.
  • For Zero-Rated Supplies (Exports): The existing process for provisional refund of 90% of the claimed amount on account of zero-rated supplies will now be based on system-driven data analysis and risk evaluation. This is a crucial step toward faster refunds for exporters.
  • For Inverted Duty Structure (IDS): The council has recommended an amendment to Section 54(6) of the CGST Act, 2017, to extend the 90% provisional refund provision to cases arising from an inverted duty structure, aligning it with the process for zero-rated supplies.
  • Officer’s Discretion: In exceptional cases, the proper officer, for reasons to be recorded in writing, can still proceed with a detailed scrutiny instead of granting the provisional refund.
• Removal of Refund Threshold: The council has recommended an amendment to Section 54(14) of the CGST Act, 2017, to remove the threshold limit for refunds on exports made with payment of tax. This will particularly benefit small exporters who use courier or postal services.
• Refund Restrictions: The CBIC has also issued notifications restricting provisional refunds for specific goods and for persons who have not undergone Aadhaar authentication.

6. Returns: Simplification and Automation

While the press release does not mention a change to the monthly filing of returns, it alludes to broader process reforms and a move towards simplification. It is also important to note other changes in returns that took place in July 2025:

• Simplified Registration Scheme: A new, optional simplified GST registration scheme will be introduced for small and low-risk businesses. The registration will be granted on an automated basis within three working days. This is expected to benefit a large percentage of new applicants.
• Simplified Registration for E-commerce Sellers: The council has approved in-principle a simplified registration mechanism for small suppliers selling through e-commerce operators, which will ease compliance for them.
• Non-Editable GSTR-3B: As of July 2025, the auto-populated values in GSTR-3B have become non-editable, ensuring consistency between GSTR-1 and GSTR-3B.

7. Input Tax Credit (ITC) and Rate Rationalization

The council has made significant recommendations concerning ITC, particularly in light of the rate changes and the inverted duty structure.

• Post-Sale Discounts: The council has recommended the omission of the requirement to have a pre-existing agreement for post-sale discounts under Section 15(3)(b)(i) of the CGST Act, 2017. Discounts can now be granted through a credit note, and a corresponding amendment has been recommended in Section 34 to ensure the recipient reverses the ITC where the value of supply is reduced. This provides much-needed clarity and resolves long-standing disputes.
• ITC Reversal for Exempt Supplies: The FAQs issued by the CBIC clarify that if a supplier’s output becomes exempt (e.g., UHT milk, Indian breads, individual life and health insurance policies), the ITC on the inputs used for such supplies must be reversed as per the CGST Rules.
• Inverted Duty Structure Correction: The rate rationalization itself corrects several inverted duty structures, such as in the manmade textile and fertilizer sectors, by lowering the GST on inputs to match or go below the rate on the finished goods. This will reduce the accumulation of unutilized ITC and the need for frequent refund applications.