v As of 22 September 2025, the GST Council has
recommended that certain goods which were taxed at 18% will now have
their GST rate reduced to 5%.
v This raises the question: If a business had claimed
Input Tax Credit (ITC) on inputs when output supplies were taxed at 18%, does
the reduction of output rate to 5% require them to reverse some or all of
that previously claimed ITC under Section 18(4) of the CGST Act?
Legal provision (Section 18(4) of the CGST
Act)
v Section 18(4) states that a registered person who
has claimed ITC must reverse ITC (i.e., pay back via debit to the electronic
credit/cash ledger) in two specific cases:
§ If the person opts for the Composition
Scheme under Section 10 (i.e. moves from normal scheme to composition scheme)
§ If the goods or services supplied by him become wholly
exempt from GST.
v Rule 44 of the CGST Rules gives the method for
calculation of the reversal in those cases (for example, proportionate reversal
based on usage, for capital goods over quarters etc).
Key reasoning: Why rate reduction (18% → 5%)
is not a basis for reversal
This
article argues (and this is consistent with current legal interpretation) that:
v A rate reduction does not mean the
supply becomes “exempt” or “wholly exempt.” The supply is still taxable,
just at a lower rate.
v The critical phrase in the law is “wholly exempt” —
meaning no GST is charged (rate = 0% or exempt category). A taxable supply at
5% is still a taxable supply.
v Therefore, since with the rate reduction the
supplies remain within the GST net (i.e. still taxable), Section 18(4) does not
apply. There is no legal requirement to reverse ITC claimed earlier just
because output GST rate has been lowered.
Example
v Suppose Rahul is a registered dealer who was
selling goods taxed at 18%, and had claimed ITC (on inputs) accordingly. After
22 September, the GST rate on those goods drops to 5%.
v Question: Does Rahul need to reverse any of the ITC
claimed earlier under Section 18(4)?
v Answer: No, because the supplies are still
taxable, just at the reduced rate. There’s no change to exemption status.
v Supporting evidence
v CBIC (Central Board of Indirect Taxes &
Customs) in prior clarifications and practice has held similar views: that mere
rate reductions do not trigger ITC reversals under Section 18(4).
v Also, there are precedents or professional
commentaries / AARs consistent with the view.
Conclusion / Takeaways
v No reversal of ITC is required under Section 18(4) merely because GST
rate on output supply has been reduced from 18% to 5%.
v The conditions under which reversal is required
remain as law states: moving to composition, or supply becoming wholly exempt.
Implications for businesses
- ITC claimed on inputs
remains usable
Businesses that have claimed ITC for inputs consumed in supplies previously taxed at 18% don’t need to worry about having to reverse that credit when the rate drops to 5%. - Invoice and accounting
systems
Firms must ensure that their invoicing, contracting, and accounting reflect the new rate from 22 September. Input and output side must align for compliance, but ITC reversal entries under Section 18(4) needn’t be considered in this scenario. - Audit / documentation
v Keep track of when rate changes happen, what goods
are affected.
v Maintain documentation that the goods in question
remain taxable (i.e. did not move to a wholly exempt category) so you’re
prepared in case of future tax authority / audit scrutiny.
- Cash flow / pricing
A reduction in output GST rate can reduce the tax burden on customers, enabling possible price reductions or margin adjustments. But because input taxes were claimed under earlier (higher) rates, businesses may see some mismatch in input vs output tax effective rate shifts. - Watch for exceptions or
special rules
If any goods are separately exempted or moved to a scheme (composition, etc.), or other special notifications are issued, those may have different implications. Always check notifications and CBIC circulars.
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