On Independence Day, PM Modi announced a major overhaul in India’s goods and services tax (GST) law — a structural simplification transitioning from a four-slab system to a streamlined two-tier model. The proposed framework envisions tax rates of 5 per cent for essential goods, 18 per cent for standard goods and services, and a 40 per cent “sin/luxury” rate for select non-essential categories. The reform is expected to deliver consumer relief, support MSMEs, streamline compliance, reduce litigation, and foster a growth-oriented tax structure.
The group of ministers constituted by the GST Council subsequently endorsed the plan to eliminate the 12 per cent and 28 per cent slabs. These recommendations were broadly approved by the GST Council on Wednesday.
In this context, businesses must proactively evaluate the multifaceted impact of the proposed changes — beyond just tax outflows — to include pricing strategies, supply contracts, ERP configurations, and litigation exposure. There are a few key areas that businesses should focus on.
Inverted duty structure
A shift from 12 per cent to 5 per cent or 28 per cent to 18 per cent rates may lead to accumulated ITC where input goods are taxed a higher rate than output products.
A notification clarifies that refunds under the inverted duty structure are not allowed when the rate reduction affects the same goods at different points in time. Refunds are allowed only when inputs and outputs attract different rates at the same time.
To truly pass on benefits to end consumers and ease working capital strain on the trade, the government may need to revisit this restriction and allow ITC refunds arising from the reform-driven rate changes.
Revisiting contracts
Businesses should conduct a comprehensive review of existing long-term or fixed-price contracts, especially those inclusive of tax, both on the procurement and sales sides, to check for the existence of “change in law” or “tax variation” clauses to avoid any tax leakages. Renegotiation or amendments may be required to protect margins and avoid exposure.
Time of supply
Section 14 of the CGST Act would get triggered in case of a change in the GST rate. Section 14 determines the time of supply based on factors such as date of invoice, date of payment and date of change in tax rate. In the light of the same, businesses must:
Evaluate transactions around the date of rate change.
Identify the date of invoice, date of payment, and date of supply to correctly apply the new rates.
Avoid disputes and penalties by ensuring correct rate application in transitional cases.
Other areas of impact
Depot Stock Transfers & ITC Mismatch: A potential mismatch may arise in ITC and output liability due to stock transfers under old tax rates. Hence, timely reconciliation of ITC and output liability is key.
Credit notes issued by vendors: Review credit notes for invoices issued under earlier rates to ensure correct GST treatment by the vendors.
ERP alignment: Reconfigure GST rates in ERP to adopt the updated rates. This includes configuring product-wise tax categories, GST codes, pricing logic, and reconciliation rules.
The GST rate rationalisation is a watershed moment in India’s indirect tax evolution. While it promises simplicity and growth, the transition phase will require meticulous preparation from businesses. Proactive engagement with contractual terms, pricing structures, IT systems, and regulatory compliance will be key to unlocking the intended benefits while mitigating potential risks.
Arvind Baheti is executive director & Jay Bohra is senior associate of Khaitan & Co