In a landmark step towards streamlining the indirect tax regime and aligning the Goods and Services Tax (GST) structure with evolving market realities, the Government of India.
has issued two key notifications:
Notification No. 9/2025-Central Tax (Rate) and
Notification No. 10/2025-Central Tax (Rate),
both dated 17th September 2025, effective from 22nd September 2025.
These notifications are based on the recommendations of the GST Council and aim to rationalise GST rates by reducing the tax burden on mass-consumption goods and providing exemptions for essential sectors.
While the reduction in rates and exemptions may seem like welcome changes on the surface, they have significant downstream effects on Input Tax Credit (ITC) management. Businesses that have availed ITC on inputs, capital goods, and input services under the earlier tax structure must now contend with potential accumulation of unused credit, mandatory reversals, compliance filings, and documentation obligations.
This article provides a comprehensive examination of the legal underpinnings, procedural mandates, and practical implications of these changes, serving as a detailed guide for taxpayers, consultants, and compliance officers preparing for the transition.
Overview of GST Rate Changes
The notifications introduce two broad categories of change that merit scrutiny: rate reduction on specified goods, and exemption of previously taxable supplies. These changes are not just fiscal adjustments, but part of a wider economic strategy aimed at easing cost pressures and fostering compliance simplicity.
A. Downward Revision of Tax Rates:
Notification No. 9/2025-Central Tax (Rate) reduces GST rates for a range of goods. Items that were earlier taxed at the highest slab of 28%-typically sin goods, luxury products, or heavily manufactured items-have now been brought down to 18% or even 5%,
depending on their nature. Similarly, goods in the 12% slab are now taxed at 5%, making them significantly more affordable for the end consumer.
B. Exemption of Specific Supplies
Notification No. 10/2025-Central Tax (Rate) exempts selection of goods and services that were earlier under the GST net. These include items considered socially essential or sensitive. The move is targeted at improving affordability and access, especially in rural and low-income segments.
However, the exemption of such goods and services introduces a critical obligation for taxpayers supplying them: the reversal of ITC that was previously claimed.
ITC Implications Under the Revised Framework
While output tax liabilities are visibly reduced, the impact on input side operations-especially with regard to IC-is more complex and demands immediate attention.
The rules governing IIC reversal, refund restrictions, and apportionment are well defined under the CGST Act and Rules, but their application in transition scenarios needs careful execution.
Legal and Regulatory:
The following legal provisions directly influence ITC treatment:
Section 16 of the CGST Act, 2017 stipulates the conditions and eligibility criteria for availing ITC.
Section 17(2) limits ITC to taxable supplies only. ITC attributable to exempt supplies must be reversed.
Section 17(3) expands the definition of exempt turnover to include non-taxable supplies, further affecting credit eligibility.
Section 54(3) restricts refunds of unutilised ITC to two situations: zero-rated supplies and notified cases of inverted duty structure.
Rules 42 and 43 deal with the apportionment of credit on inputs/input services and capital goods, respectively.
Rule 44 outlines the methodology for reversing ITC on inputs and capital goods when goods/services become exempt or registration is cancelled.
Circular No. 135/05/2020-GST (31.03.2020): Explicitly disallows refunds of accumulated ITC caused by GST rate reductions.
Circular No. 181/13/2022-GST (10.11.2022): Clarifies refund entitlements and constraints under the inverted duty structure.
Detailed analysis of ITC scenarios post notification
Scenario 1: Downward GST Rate Revision (Notification No. 9/2025)
A reduction in GST rate typically results in accumulated ITC, especially where inputs continue to be taxed at higher rates. For example, a manufacturer of kitchen appliances taxed earlier at 28% but now at 18% will find that IIC on raw materials (still at 18%) may exceed output tax, causing surplus credit.
As per Circular No. 135/05/2020-GST, refund of such accumulated ITC is not permitted. However, the credit remains in the electronic credit ledger and can be used for future output tax liabilities. No reversal is required under this scenario.
Scenario 2: Transition to Exempt supply (Notification No. 10/2025)
Supplies that become exempt from 22.09.2025 trigger a statutory obligation to reverse previously claimed ITC. This includes credit on:
Inputs held in stock,
Semi-finished and finished goods,
Capital goods (based on remaining useful life in months).
Compliance Mandates:
File FORM GST ITC-03 within 30 days of the exemption coming into effect (i.e., by 21.10.2025).
Obtain CA/CMA certification if the total credit to be reversed exceeds ₹2,00,000.
Disclose reversal in GSTR-3B (Table 4(B)(2)) and report it in GSTR-9.
Compliance Checklist:
The following action plan will help ensure that all regulatory obligations are met:
- Conduct a physical and accounting reconciliation of inputs, semi-finished, and finished goods as of 21.09.2025.
- Review: Calculate remaining useful life of capital goods per Rule 44.
- ITC-03 Preparation: Complete computation worksheets for reversal and prepare documentation.
- File ITC-03: Ensure submission by 21.10.2025 along with CA/CMA certification if reversal exceeds 2 lakh.
- GST Returns Update: Incorporate IIC reversal details in GSTR-3B and GSTR-9.
- Staff Training: Update internal teams on the implications of Notifications 9/2025
and 10/2025.
Notification-wise Impact Matrix
Some Frequently Asked Questions (FAQs)
Q1: Is ITC reversal required when GST rate is reduced?
A: No. The credit remains valid. Reversal is not necessary.
Q2: Can businesses claim refund of accumulated ITC due to rate reduction?
A: No. As per Circular 135/05/2020-GST, such refunds are not permitted.
Q3: What is the compliance timeline for ITC reversal on exempted supplies?
A: File ITC-03 within 30 days from the exemption date. For supplies exempted w.e.f. 22.09.2025, file by 21.10.2025.
Q4: Is certification required for ITC-03 submission?
A: Yes, if the total credit reversed exceeds 2 lakh, a certificate from a CA/CMA is
mandatory.
Q5: Where should the reversal details be reported?
A: In GSTR-3B (Table 4(B)(2)) and also disclosed in the annual return GSTR-9.
Before parting
The changes introduced through Notification No. 9/2025 and Notification No. 10/2025 are far-reaching. They reflect a policy shift toward simplification and inclusivity, but also place considerable responsibility on businesses to adapt swiftly. The IIC implications are particularly critical, as incorrect or delayed action may result in denied refunds, blocked credits, or future audit complications.
Taxpayers are advised to:
Conduct a proactive impact analysis,
Engage professional advisors,
Automate and digitize IIC tracking,
Train staff for improved awareness,
And implement internal controls for reversal and reporting.
In essence, the 2025 GST rate rationalisation is an opportunity to reengineer compliance practices and embrace a more disciplined approach to indirect tax management.
Disclaimer
This article is intended solely for educational and informational purposes. Readers should not consider this as professional tax advice. For any action or decision, please refer to the actual GST laws and notifications.
