Key Action Points for Implementation of GST 2.0 Reforms

Effective September 22, 2025, significant GST rate changes will impact businesses across India. This comprehensive guide covers critical implementation requirements, tax credit implications, and strategic considerations for seamless transition.

1.      Changes in accounting/Billing system

The Taxpayers should update new GST Rates effective from 22nd September 2025. However, old rates should also be continued for some time to address any issuance of Debit Notes and Credit Notes.

2.      Impact on Input tax credit on GST Rate Revision

In cases where Rates are reduced

No need to reverse any ITC. If stock as on 22nd September 2025 has been manufactured or purchased with old GST rates (18% or 12%), then such ITC can be utilized for payment of output GST at lower rate.

In cases where Rates revised are without ITC option or are exmepted

The Taxpayer cannot avail any ITC on goods or services received exclusively for such services/goods where ITC not available or GST has been exempted like Hotel Accommodation having value less than Rs. 7500/-

The Common ITC attributable to taxable supplies (i.e. GST rate with ITC) and exempted supplies (including supplies having GST rate without ITC) will be reversed as per Rule 42 (for inputs and input services) and Rule 43 of CGST Rules, 2017 (for capital goods).

3.      Reversal of ITC in case where supplies become wholly exempted

ITC availed on goods lying in stock as on 22nd September 2025 and ITC availed on capital goods (reduced by prescribed percentage points) shall be reversed either by Credit Ledger or Cash Ledger.

Further, any credit balance lying in Credit Ledger shall be lapsed as per Section 18(5). However, in cases where the registered person still deals in taxable supplies which has not become wholly exempt then reversal under Section 18(5) will not apply.

4.      Eligibility of Refund due to Rate Reduction on Outward Supplies

Where GST rates on finished goods are reduced, but the inputs used for manufacturing/supplying such goods continue to attract a higher GST rate, the registered person is eligible to claim a refund of Input Tax Credit under the Inverted Duty Structure provisions.

However, no refund shall be available in situations where the same input and output attract different GST rates merely due to a change in rate over time. For instance, a trader/dealer/distributor holding stock purchased at 12%/18% GST as on 22nd September 2025, which will now be sold at the reduced GST rate of 5%, will not be entitled to refund.

5.      Determination of Effective Date for GST Rate Change

We need to refer to the provisions of Section 14 of the CGST Act, 2017. The brief of such provisions are given below:

GST Rates for Credit and Debit Notes

Same as applicable for original supply of goods.

6.      Review of ongoing contracts/agreements/prices and suitable revision

a.     In case of reduction in GST rates, where contracts/agreements are tax-inclusive without passing on the benefit, the reduction will effectively benefit the supplier and result in an additional cost to the recipient.

b.      In case of an increase in GST rates, where ongoing contracts contain tax-inclusive clauses without reimbursement provisions, the additional tax burden will fall on the supplier.

7.      Treatment of Accumulated Compensation Cess

Compensation cess will be removed on all items except Tobacco products. There may be a situation where taxpayers who had availed credit of Compensation Cess on inputs (for goods that attracted Compensation Cess up to 21.09.2025) are left with accumulated credit as on 22nd September 2025. Since such credit can no longer be used for payment of Cess, and the present legal framework does not permit its utilization towards Basic GST, it would effectively turn into a cost.

This remains an unresolved matter, as no clarification has yet been issued on the treatment or transition of such credit.

8.      Passing on benefits of Price reduction

Nevertheless, the underlying objective of such rate reductions is to provide relief to the end consumer. That said, businesses should maintain a suitable working to capture the net benefit from the rate reduction, after considering any loss/expenses.

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Disclaimer: This GST update has been compiled for our clients and team of Seth & Associates. The same is not being circulated with the intent of advertising or soliciting any professional work. This update is only for the purpose of ease of understanding.

For a detailed discussion and professional advisory on matters related to GST kindly contact:

CA Dhruv Seth                                                                           CA Shashank Mittal

Partner – GST                                                                            HOD - GST

dhruv@sethspro.com                                                                  shashank@sethspro.com