The GST Council's latest recommendations bring significant changes to how businesses across India will manage taxation. Effective September 22, 2025, these new rates streamline operations, reduce compliance burdens, and empower businesses with clearer tax structures.
Here are the new GST rate changes:
- Small cars: GST reduced from 28% to 18%
- Motorcycles up to 350cc: GST reduced from 28% to 18%
- Bicycles and parts: GST reduced from 12% to 5%
- Agriculture machinery & renewable energy equipment: GST reduced from 12% to 5%
- Medicines: Brought under a concessional 5% rate
- Toilet soap bars, shampoos, face powder, shaving cream: GST reduced to 5%
- Luxury and sin goods (big cars, SUVs, gambling, casinos, IPL tickets, bikes above 350cc): Flat 40% GST, replacing 28% + cess
These changes aim to simplify the tax structure, cut costs on essentials, and ensure parity across categories. While the overall rationalisation is clear, you may still have questions on invoicing, ITC, imports, exemptions, and services. To help, we’ve put together this FAQ guide on the new GST rates 2025.
Understanding the Timeline and Implementation
When do the new GST rates take effect?
The revised GST rates come into force on September 22, 2025, based on recommendations from the GST Council's 56th meeting. This applies to all services and goods except specific tobacco products like cigarettes, chewing tobacco products (zarda), unmanufactured tobacco, and beedi. These excluded items will transition to new rates later, pending complete discharge of compensation cess loan and interest liabilities.
What happens if I supplied goods before the rate change but issued invoices later?
Your tax liability depends on payment timing under Section 14(a)(i) of CGST Act, 2017:
- Payment received after rate change: Time of supply becomes the earlier of payment receipt date or invoice issue date
- Payment received before rate change: Time of supply remains the payment receipt date
This clarity eliminates confusion and ensures seamless transition for ongoing business operations.
Managing Input Tax Credit (ITC) During Transition
Can I use existing ITC from higher rates after the reduction?
Absolutely. Input tax credit already accumulated in your e-credit ledger remains fully usable for discharging any output tax liability under Section 49(4) of the CGST Act. This ensures your business operations continue smoothly without losing previously earned credits.
What if my supply becomes exempt under the new rates?
For supplies made until September 21, 2025, you can utilize existing ITC normally. However, for supplies from September 22, 2025 onwards, when your output becomes exempt, you'll need to reverse the ITC as per the CGST Act provisions. This maintains the integrity of the credit system while adapting to new rate structures.
Will I get refunds for accumulated ITC from inverted duty structures?
The accumulated ITC refund mechanism continues as per existing provisions. However, note that input and output goods attracting different tax rates at different times don't automatically qualify for inverted duty structure refunds under Section 54(3) clause (ii).
Vehicle and Transportation: Major Rate Overhaul
Small Cars - Significant Relief
New Rate: 18% GST (reduced from 28%)
Small cars now enjoy substantial tax reduction, making mobility more accessible:
- Petrol, LPG, or CNG cars: Engine capacity up to 1200cc, length up to 4000mm
- Diesel cars: Engine capacity up to 1500cc, length up to 4000mm
Mid-size and Large Vehicles - Special Rate Structure
New Rate: 40% GST (no compensation cess)
This replaces the previous structure of 28% GST plus 17-22% compensation cess. Vehicles exceeding 1500cc or 4000mm length now have simplified taxation.
Utility Vehicles - Standardized Taxation
New Rate: 40% GST
All Utility Vehicles including SUVs, MUVs, MPVs, and XUVs with:
- Engine capacity exceeding 1500cc
- Length exceeding 4000mm
- Ground clearance of 170mm and above
Commercial Vehicles - Business-Friendly Rates
New Rate: 18% GST (reduced from 28%)
This significant reduction benefits:
- Buses and passenger vehicles (10+ persons including driver)
- Goods transport vehicles (lorries and trucks)
- Ambulances with necessary fitments
- Three-wheelers under HSN 8703
Two-Wheelers - Segmented Approach
- Motorcycles up to 350cc: 18% GST
- Motorcycles exceeding 350cc: 40% GST
This structure balances accessibility for essential transportation with luxury taxation for premium vehicles.
Healthcare and Medical Devices: Enhanced Accessibility
Medicine Taxation - Universal 5% Rate
All drugs and medicines now attract a concessional 5% GST rate, except those specifically exempted. This reduces healthcare costs while maintaining the input credit chain for manufacturers, preventing cost escalation.
Medical Devices - Comprehensive Rate Reduction
New Rate: 5% GST
All medical devices, instruments, and apparatus for medical, surgical, dental, and veterinary uses benefit from this reduced rate. While this may deepen inverted duty structures for some manufacturers, the available refund mechanism for accumulated ITC ensures cost neutrality.
Insurance Services: Complete Exemption
Life Insurance - Full Relief
All individual life insurance policies receive complete GST exemption:
- Term insurance plans
- ULIP policies
- Endowment plans
- Reinsurance services
Health Insurance - Healthcare Support
Complete GST exemption covers:
- Individual health insurance policies
- Family floater plans
- Senior citizen policies
- Related reinsurance services
This move significantly reduces the financial burden on families seeking insurance protection.
Transportation Services: Flexible Options
Passenger Transportation - Dual Rate Structure
Service providers gain flexibility with two options:
- Merit rate: 5% GST with no ITC
- Standard rate: 18% GST with full ITC
This empowers businesses to choose the structure that best suits their operational model.
Goods Transportation - Continued Flexibility
Goods Transport Agencies (GTAs) retain their dual options:
- Merit rate: 5% GST with no ITC
- Standard rate: 18% GST with full ITC
Specialized Transport Services
Container Train Operators: Same dual rate option (5% without ITC or 18% with full ITC)
Multimodal Transportation:
- Without air transport: 5% GST with restricted ITC
- With air transport: 18% GST with full ITC
Essential Goods: Simplified Structures
Food and Agriculture - Enhanced Support
Several food items receive preferential treatment:
- UHT milk: Now exempt (matching other dairy milk)
- Plant-based milk drinks: Reduced to 5%
- Food preparations not elsewhere specified: 5% GST
- All Indian breads: Complete exemption
- Natural honey: Preferential treatment over artificial alternatives
Agricultural Equipment - Balanced Support
New Rate: 5% GST (reduced from 12%)
Agricultural machinery including sprinklers, drip irrigation systems, and harvesting equipment receive significant rate reductions. This balances farmer relief with maintaining domestic manufacturing viability through the input credit system.
Personal Care and Household Items
Daily Use Items - Affordable Access
New Rate: 5% GST
Essential personal care items now cost less:
- Toilet soap bars
- Face powder
- Shampoos
- Toothpaste, toothbrushes, and dental floss
This directly benefits middle-class and lower-income households by reducing monthly expenditure on necessities.
Technology and Electronics: Uniform Structures
Consumer Electronics - Standardized Rates
New Rate: 18% GST (reduced from 28% for many items)
- Air conditioners and dishwashers
- All TVs and monitors (regardless of screen size)
- All batteries under HSN 8507 (uniform rate replacing previous 18%/28% split)
Renewable Energy - Growth Support
New Rate: 5% GST (reduced from 12%)
Renewable energy equipment and devices receive enhanced support, promoting sustainable energy adoption despite potential inverted duty structure deepening.
Service Sector Transformations
Beauty and Wellness - Accessible Services
New Rate: 5% GST without ITC (reduced from 18%)
Services are now more affordable:
- Health clubs and fitness centers
- Salons and barber services
- Yoga and wellness centers
Entertainment and Gaming - Premium Taxation
New Rate: 40% GST
Premium entertainment attracts higher taxation:
- Lottery tickets, betting, gambling, horse racing
- Casino services
- Online money gaming
- IPL and similar sporting event admissions
Job Work Services - Industry-Specific Rates
Pharmaceutical job work: 5% with ITC (reduced from 12%)
Hides, skins, and leather job work: 5% with ITC (reduced from 12%)
Residuary job work: 18% (increased from 12%)
Implementation Best Practices
E-way Bills and Transit Goods
Goods in transit when new rates take effect don't require e-way bill cancellation or regeneration. Existing e-way bills remain valid for their original validity period, ensuring smooth logistics operations.
Stock Valuation
GST applies to supply, not stock holding. Goods supplied on or after September 22, 2025, will attract new rates regardless of when they were manufactured or stocked.
IGST on Imports
Import rates align with domestic GST rates as notified, except where specific IGST exemptions apply.
Strategic Business Considerations
Rate Structure Philosophy
The new rates follow core principles:
- Similar goods, similar rates: Reduces classification disputes
- Merit goods support: Lower rates for essential items
- Luxury taxation: Higher rates for premium products
- Manufacturing support: Maintaining input credit chains
What GST rate to apply if some events (Ex: Payment, Supply of goods) happens before 22nd September but invoicing is done after 22nd September?
Time of Supply is determined based on below 3 parameters:
- Supply of Goods/Service
- Payment received
- Invoice issued
If any 2 out of 3 above events happen before 22nd September, old rate is to be applied. If any 2 out of above 3 events happens after 22nd September, new GST rates to be applied.
If invoice is issued with old rate before 22nd September, Credit note/debit note is being issued after 22nd September what GST rate to be applied.
- Supply of Goods/Service
- Payment received
- Credit/Debit note issued
If any 2 out of 3 above events happens before 22nd September, old rate to be applied. If any 2 out of above 3 events happens after 22nd September, new GST rates to be applied.
What if an advance is received before 22nd September at old rate (Ex: 12%) and on taxable supply of Rs 100 and tax liability of 12 Rs tax. But Supply happens after 22nd September at new lower rate (5%) Ex: Taxable value of 120 and tax value of Rs 6.
In GSTR-1/3B against the supply, the tax liability of Rs 6 gets reduced (adjustment of advance). However still another 6 Rs of tax liability is left, hence credit note needs to be issued to reverse Rs 6 liability. Credit note can be passed for zero value while overriding taxable value as Rs 120 and at 5%, with a tax value as Rs 6
I have purchased goods or services before 22nd September at the older, higher GST rate (Ex: 28%). However, my sales done after 22nd September are at the lower GST rate (Ex: 18%). Can I use ITC of 28% purchase to set off liability of 18% sales?
All ITC available in 2B/3B and therefore in the ITC e-ledger can be used to set off liability.
I have purchased inputs at 12%, but however, after 22nd September my goods/service has been classified as exempt. Can I still avail accumulated ITC?
ITC can be consumed only to the extent of sales done till 21st September. The remaining ITC pertaining to exempt supplies needs to be reversed.
If an e-way bill is generated before 22nd September with the old rates (Ex: 12%) but goods reach their destination after 22nd September (Ex: 5%), should the e-way bill be cancelled and re-issued?
No requirement for cancelling the e-way bill for goods in transit during the transitionary period.
Process Improvements
The GST Council recommends process reforms for expedited refunds, particularly benefiting manufacturers facing inverted duty structures in renewable energy, medical devices, and agricultural equipment sectors.
Moving Forward
These comprehensive changes create a more intuitive, business-friendly tax environment. By simplifying rate structures, reducing compliance complexity, and supporting essential goods and services, the new GST framework empowers businesses to focus on growth rather than navigating complex tax provisions.
The key to a successful transition lies in understanding how these changes specifically impact your business operations. Review your product mix, service offerings, and compliance processes to optimize benefits from the new rate structure.
