CA Siddharth Surana
The recent reforms recommended by the 56th GST Council Meeting are expected to give a fillip to consumer spending and resultantly boost economic growth. These reforms are a welcome change in turbulent times, and in our view, are mega changes with significant impact and incidence. The focus of these reforms in addition to driving consumption, is also to support exporters, rate rationalization for key sectors and also to support Small and Medium Enterprises.
The recent GST Council meeting has performed a major rejig of the GST rate slabs and amended GST rates on various products across sectors. It is important for businesses to keep track of the revised rates on their products and services and also understand the impact of these rate changes on existing and running contracts.
In this article, we discuss the major impacts of these recommendations.
Discontinuation of the Compensation Cess Mechanism:
The withdrawal of the Compensation Cess mechanism has been a subject of extensive discussion at several GST Council meetings. While the arrangement had been extended multiple times in the past, the Council has now moved towards a more definitive approach.
Compensation Cess was originally levied over and above the highest GST slab of 28%, covering products such as aerated beverages, motor vehicles, tobacco products, and others commonly referred to as demerit goods.
With the imminent phase-out of Compensation Cess, the GST Council has recommended a restructuring of rates for such goods. Accordingly, a new 40% GST slab has been introduced for the following categories:
- Pan masala
- Caffeinated beverages
- Carbonated fruit-based beverages
- Cigars, cigarettes, tobacco and substitutes
- Mid-size and large motor vehicles (engine capacity above 1500 cc or length above 4000 mm)
- Certain Utility vehicles (engine capacity above 1500 cc, length above 4000 mm and ground clearance of 170 mm or more)
- Private jets and yachts
- Casinos, race clubs and gambling
- Admission to certain high-value sporting events such as the IPL
Under the earlier framework, GST was charged at 28% along with Compensation Cess. With the withdrawal of the Cess, the 40% GST slab has been introduced to ensure that the overall tax incidence remains broadly aligned with pre-existing levels.
It is pertinent to note that currently mid-size and big cars attract 28% GST and compensation cess ranging from 17-22% with the overall tax incidence ranging from 45-50%. Now the GST rates once notified on these vehicles shall be 40% with no compensation cess.
Rate Rationalisation
As against the current 4 tiered rate structure the Council has recommended a two rate structure with a standard GST rate of 18% and a Merit rate of 5%. Further, a special demerit rate of 40% has been recommended for certain goods and services (in common parlance referred as “sin goods”). So, with a view to simplify rate structures, the products falling within the 12% slab and 28% slab have been reclassed to the new rate structures. Some of the major rate reforms are provided below:
- Reduction of GST from 28% to 18% on microwaves, air conditioning machines, televisions and small cars. For the purposes of GST, small cars refer to Petrol, LPG, or CNG cars with engine capacity up to 1200 cc and length up to 4000 mm and Diesel cars with engine capacity up to 1500 cc and length up to 4000 mm.
- Motor vehicles cleared as ambulances, and duly fitted with all necessary fitments, furniture, and accessories necessary for an ambulance at the time of clearance from the factory will attract a GST rate of 18%. It has been reduced from 28%.
- Lorries and trucks intended for transport of goods shall reduce from 28% to 18%.
- The GST rate on renewable energy equipment/devices that were at 12% has been reduced to 5%.
- Earlier, marble and travertine blocks and granite blocks attracted GST rate of 12%. These are in the nature of intermediate goods and GST rate on these goods has been reduced to 5%.
- Earlier, there were certain medicines falling within the 12% slab. All drugs/ medicines have been prescribed a concessional rate of GST of 5%, except those specified at nil rate.
- Reduction of GST from 28% to 18% on Cement
Exemptions on life and personal health insurance policies
The GST Council has recommended an exemption of GST on all types of life insurance policies which has also been clarified to include Unit Linked Insurance Plans (ULIPs) and endowment policies. Further, GST exemption on all individual health insurance policies, including family floaters and senior citizen policies, have also been recommended. The exemption is also recommended to extend to reinsurance policies. This is a welcome move and is expected to augment the insurance coverage penetration in India.
Major Impact on Real Estate and Infrastructure Sector
The reduction in GST on cement from 28% to 18% is set to bring welcome relief to two of India’s most critical sectors—real estate and infrastructure. While most real estate developers opt for the 5% GST scheme without Input Tax Credit (ITC) and a large share of infrastructure projects are exempt or do not claim ITC, cement continues to remain one of the biggest cost drivers. This rate cut is therefore more than just a tax relief—it directly translates into lower project costs, improved cash flows, and offers a strong boost to housing affordability and infrastructure development.
Measures to make India a competitive Global Service Delivery Hub
One of the most debated issues under GST has been the taxability of intermediary services. Under the current regime, for most cross-border services, the place of supply is determined as the location of the recipient. This ensures that if the recipient is outside India, the transaction qualifies as an export of services and enjoys zero-rated tax benefits.
However, in the case of intermediary services, a special provision deems the place of supply to be the location of the supplier in India. As a result, service providers are required to pay GST, leading to higher costs and reduced competitiveness.
The GST Council has now recommended removing this special rule and aligning intermediary services with other cross-border services. This change is expected to reduce unnecessary litigation by streamlining the classification and taxability of services, enhance tax certainty and trust for exporters and provide a strong boost to Indian affiliates of Multinational Companies, Global Capability Centres (GCCs), and the IT/ITeS sector. In essence, this move will not only simplify the GST framework but also make India a more competitive destination for global service delivery.
Retail Sale Price based Taxation for Tobacco and Tobacco Products
The GST Council had, in the earlier Council meetings, constituted a Group of Ministers to look into capacity-based taxation for commodities like pan masala and gutka. There is an issue of tax evasion in these products, and it was proposed to introduce a tax based on maximum retail prices of these commodities and to shift the burden of taxation to the manufacturing stage. In the recent 56th GST Council Meeting it appears that this has made progress and notifications and amendments in rules will be announced soon.
Views expressed are personal.
