On 3 September 2025, the GST Council unveiled its eagerly awaited ‘Diwali Bonanza,’ delivering sweeping tax reforms ahead of the festival season. Though the session was scheduled for two days, consensus was reached within a single day after intense deliberations. The announcement sparked audible cheers from the consumers nationwide.
This article provides a comprehensive bird’s-eye view of the GST reforms that were unveiled just in time for Diwali.
Reduction in classification disputes and benefit to ‘lower middle class’ in focus
The primary concern behind rate rationalisation was to make the goods and services, pocket friendly for ‘lower middle class’. This is because of the reason that even though India’s middle class contributes almost 45% of the country’s GDP, the contribution of ‘lower middle class’ remains fairly low i.e. around 10-15% of the GDP. The intent to support ‘lower middle class’ is evident from the rate reductions in sectors such as food, automobile, consumer electronics and other daily household goods.
Another key objective was to minimize litigation arising from ambiguities in classification. On account of changes in tax rates, the issues relating to classification of parts of automobiles and the medical-cosmetics distinction for majority of products seems to have been put to rest since a unform rate of 18% (auto parts) and 5% (medicaments/cosmetics) has been made applicable on them.
It is expected that lower taxes will eventually boost demand across many products. However, expensive consumer durables like high-end cosmetics, white goods may not see an immediate increase in demand even post tax rate cuts, due to the consumers budget for such items. Moreover, because these reforms do not differentiate between premium and luxury brands basis their value or brands, it is possible that the main beneficiaries could end up being luxury brands, instead of everyday, affordable options.
Mixed response from service sector
The service sector has shown mixed reviews to the changes in the service sector. A much awaited and anticipated relief has been granted by exempting life and health insurance for individuals. While the industry was expecting 5% GST rate with ITC, the blanket exemption seems to have been approved by GST Council. Additionally, services such as hotel accommodation services, third party insurance, specific job work services, beauty and well being services have been given the benefit of reduced rates. The tax rate on majority of the other services such as renting of vehicles, residuary job work services, air transport services by other than economy class has seen an upward trend (12% to 18%). A notable relief has been given to food delivery platforms by notifying the delivery services under Section 9(5) of CGST Act, thus, putting to rest the ongoing disputes.
Trust in industry to deliver the savings
The Government has shown trust that the industry players will pass on the benefits of tax relief to the common man. It was indicated by Revenue Secretary in the press conference that there is no intention to bring back the Anti Profiteering provisions considering the number of complaints filed during implementation of GST and the amount profiteered by the Industries. The Government is hopeful that the businesses will effectively do their part in transmitting the benefits as many industries have already publicly committed to the same. It would be interesting to see if the market forces would alone suffice to deliver the benefit of tax reduction to consumers or the authorities will have to step in and re-enforce anti profiteering provisions.
Another pressing concern being faced by industry is whether the increased cost on account of accumulated ITC, or denial of ITC due to the goods or services (such as insurance) becoming exempt can be factored in the cost while passing on the benefits to the consumers. The Government is conscious of the fact that loss of ITC would lead to increased costs as the rates on many commodities was not reduced to Nil due to the fear of taxpayers passing on the cost to consumers. Though the logical way would be to include such costs, the industry is expecting some clarification from the Government to avoid potential disputes.
Fate of accumulated credits?
With the media reports of reduction in tax rates post the speech on 15 August, the dealers and customers had already put a halt on their purchases. Since the rate reductions have now been formally announced and are set to roll out from 22 September 2025, the sales will probably see a further slowdown in the next 2 weeks, which will lead to accumulation of ITC balances. In high probability, while the manufacturers would be able to utilise their credits, the dealers may not be in a situation to utilise it. The key question in such case is whether the taxpayers can claim refund of such ITC under Section 54 of CGST Act as a part of inverted duty structure since the tax rate at the time of purchase was higher than the tax rate on sale. The issue remains unresolved, as recent FAQs continue to reflect a negative stance. Consistent with Circular No. 173/05/2022-GST dated 6 July 2022, the refund remains explicitly denied. While dealers have the option to challenge these restrictions, the practicality and feasibility of such legal recourse remain uncertain.
Moreover, the elimination of cess would also lead to situation of unutilised and accumulated cess in beverage and automobile industry. Since there is no mechanism to utilise the cess or claim refund, the industry is expecting some relief from the Government.
Tobacco industry
The products such as pan masala, Gutkha, Cigarettes, Unmanufactured Tobacco, Chewing Tobacco will continue to attract the existing rates and cess until the loan and interest payment obligations under the compensation cess are completely discharged. A significant change is the proposed shift from transaction value to the Retail Sale Price (RSP) as the basis for taxation on these items. It remains to be seen whether this RSP-based tax will be applied at the manufacturing stage or at the distributor, wholesaler or retail level. If manufacturer or distributors are required to pay the tax on RSP and no tax is imposed on wholesaler or retailer, it could disrupt the input tax credit (ITC) chain. A clarity is awaited on the aspect of RSP based taxation and this dilemma will only unfold once the relevant rules and changes are in place.
Intermediary services
The move to omit Section 13(8) of IGST Act and making the recipient of services as the place of supply of intermediary services is a bold and positive move. The exports will now be eligible to claim the benefit of zero-rated supplies. On the other hand, the importers will have to pay tax under RCM which can be availed as ITC, subject to conditions under GST law. This amendment is intended to put to rest, a number of pending litigations.
Discount schemes
The proposed removal of conditions of establishment of discounts before the supply and linking the discounts with original supplies will be a game changer for the industry as it will eliminate the practical challenges. While more clarity on changes in discount provisions is awaited, a doubt which surfaces here is whether post omission of conditions relating to discounts, can the taxpayers be asked to establish the discounts prior to supply as a perquisite to qualify as discounts. Other clarifications such as non-reversal of ITC on account of post-sale discount passed through financial credit notes, treatment of the post-sale discount provided by manufacturer to the dealer as additional consideration, or promotional activities will also address the long-standing concerns of the industry.
GST Council living up to the expectations
Overall, it would not be wrong to say that this GST Council Meeting has truly lived up to the expectations of the industry as well as the consumers. These reforms would ease household burdens, encourage additional savings in the hands of the common man and increased consumption while improving clarity in the tax structure. Although it is expected that there will be some impact on Government Revenues, it is apprehended that the long-term benefits of higher demand and increased fiscal sustainability will help balance this out. The challenge for the Government remains now is to ensure that the benefits are effectively delivered to the consumers and that the businesses remain committed to making this transition smooth, fair and beneficial to the broader economy.
[The authors are Executive Partner and Associate Partner, respectively, in GST practice at Lakshmikumaran & Sridharan Attorneys]
