GST strategy: rates, structuring and expansion
Everything in the first four guides is about getting right what has already happened. This guide is about the decisions taken before the transaction: what rate applies, where the supply is treated as made, whether a contract qualifies as an export, and what changes when you enter a new state or a new line of business. These are the decisions where GST is still worth real money rather than merely costing time.
The rate structure after September 2025
The 56th GST Council, meeting on 3 September 2025, recommended collapsing the four-slab structure into a standard rate of 18%, a merit rate of 5% and a special demerit rate of 40% on a specified list. It took effect on 22 September 2025.
What actually happened is more textured than the headline. The claim that only 5%, 18% and 40% now exist is repeated widely and is not accurate:
- Nil, 0.25%, 1.5% and 3% survive, covering precious stones, cut and polished diamonds and precious metals.
- 12% survives for bricks and roofing tiles under a separate notification, alongside a 6% option without credit for manufacturers of those items. This is the exception most likely to catch a construction-adjacent business.
- A 28% schedule was retained purely as a holding position for tobacco and pan masala until those moved to 40% on 1 February 2026, with biris at 18%. Compensation cess on tobacco ceased at the same time, replaced by an additional central excise duty and a new cess on pan masala, with valuation moving to retail sale price.
- Compensation cess otherwise ceased on 22 September 2025, its incidence folded into the 40% rate.
Movements worth knowing for an ordinary business: air conditioners, televisions, dishwashers, cement, small cars, motorcycles up to 350cc, buses and trucks came down from 28% to 18%. Tractors and agricultural machinery, and a long list of everyday consumer goods, came down to 5%. Ultra-high-temperature milk, pre-packaged paneer and Indian breads went to nil. Aerated and caffeinated beverages, larger cars and motorcycles, and certain luxury items went to 40%, as did betting, gambling, casinos, lotteries, online money gaming and admission to certain sporting events.
Service rates that changed, and the ones that quietly cost more now
| Service | Position since 22 September 2025 |
|---|---|
| Hotel accommodation | 5% without credit where the value per unit per day is ₹7,500 or less, and it is mandatory rather than an option. Above that, 18% with credit. The test has been based on the preceding year’s actual value of supply, plus an opt-in declaration, since a change made in 2025, not on declared tariff |
| Restaurant services | 5% without credit as standard; 18% with credit only in specified premises. A stand-alone restaurant cannot declare itself specified premises to reach the 18% with-credit option |
| Goods transport agency | 5% without credit, or 18% with full credit under forward charge. The 12% with-credit forward-charge option is gone. This is still being described as available in 2026 material |
| Works contract | 18% across the board. The 12% concessional rate for specified government and other works contracts was removed |
| Job work | Restructured: 1.5% for diamond work, 5% for a specified list including pharmaceuticals, leather, umbrellas and bricks, and 18% for the residual entry, meaning most job work moved from 12% to 18% |
| Courier, postal and delivery services | Raised to 18% |
| Passenger and multimodal transport | 5% without credit or 18% with full credit; economy air travel 5%, other classes 18%; multimodal goods transport 5% with credit on input services capped at 5% where no leg is by air, 18% with full credit where air is involved |
| Renting of commercial property | 18% with credit, unchanged |
Insurance is the change with the most misunderstood consequence. From 22 September 2025 all individual life insurance policies and all individual health insurance policies, including family floaters and senior citizen policies, and reinsurance of them, became exempt. Exempt, not zero-rated. Group policies, including employer-sponsored group health and group term cover, remain at 18%.
Because it is an exemption, Section 17(2) applies and insurers must apportion and reverse credit under Rules 42 and 43 on inputs attributable to the now-exempt individual book. The tax is embedded in the cost of the premium rather than removed from it. For a corporate buyer the practical points are that group cover did not get cheaper, and that an insurer’s pricing may not fall by the full headline amount.
Classification, and how a classification argument is actually resolved
Goods follow the Harmonised System of Nomenclature under the Customs Tariff Act, with its section and chapter notes and general rules of interpretation. Services follow the Service Accounting Code annexed to the service rate notification.
On invoices, a business with preceding-year aggregate turnover above ₹5 crore must show six digits on all invoices; at or below ₹5 crore it is four digits, and only on business-to-business invoices. Eight digits are mandatory for specified export, import and chemical entries. The same thresholds apply in Table 12 of GSTR-1, where since the May 2025 return period the code is chosen from a mandatory dropdown rather than typed, the description auto-populates and cannot be edited, the table is split into separate business-to-business and business-to-consumer tabs, and values are validated against the rest of the return.
When a classification is genuinely arguable, the route is an advance ruling at state level, then the state Appellate Authority for Advance Ruling. A ruling binds only the applicant and the concerned officer, and only in that state, which is why two states can reach opposite answers on the same product.
That gap is finally being addressed. The National Appellate Authority for Advance Ruling, which exists in the Act to resolve conflicting state rulings, was never constituted. The Finance Act 2026 inserted Section 101A(1A), effective 1 April 2026, allowing an existing tribunal to be designated in the interim, and a notification of 7 May 2026 empowered the Principal Bench of the GST Appellate Tribunal to hear those appeals, deemed effective from 1 April 2026. For the first time there is a forum for a conflict between two states’ appellate rulings.
Place of supply, and the change that reopened exports for intermediaries
Place of supply decides whether a transaction is intra-state, inter-state, or outside the tax altogether. Two rules do most of the work in ordinary trade.
Bill-to and ship-to, Section 10(1)(b). Where goods are delivered to a person on the direction of a third person, the place of supply is the principal place of business of that third person, not where the goods physically go. This is what produces integrated tax on a transaction where the supplier and the recipient of the goods are in the same state, and it surprises people every time.
Services between two Indian parties, Section 12. The default is the recipient’s location where registered, and the address on record otherwise. Note that the proviso to Section 12(8), which used to put the place of supply of export freight outside India, was omitted with effect from 1 October 2023. Freight billed to a registered Indian customer for goods moving abroad is now an ordinary domestic supply at the customer’s location.
Intermediary services: the position reversed on 30 March 2026
Section 13(8)(b) of the Integrated Goods and Services Tax Act deemed the place of supply of intermediary services to be the location of the supplier. For an Indian commission agent, marketing support business, freight brokerage or referral business serving a foreign principal, that single provision made the place of supply India, defeated the export test, and put 18% on the invoice.
It was omitted by the Finance Act 2026, which received assent on 30 March 2026, and the omission took effect on that date without needing a separate commencement notification. Intermediary services now fall to the ordinary rule in Section 13(2), the location of the recipient.
What opens up
Where the principal is outside India and the remaining export conditions are met, the supply is now an export of services, zero-rated. A letter of undertaking, no tax on the invoice, and a refund of accumulated credit become available to a category of business that was shut out of all three.
What closes in
The change is symmetrical. An Indian business receiving intermediary services from abroad now has the place of supply in India, an import of service taxable under reverse charge at 18%, with self-invoicing and credit where otherwise eligible. Most buyers have not budgeted for this.
Two cautions. The definition of intermediary in Section 2(13) was not amended, so the long-running argument about who is an intermediary survives; it simply now decides the reverse charge outcome on what you buy rather than the export outcome on what you sell. And the omission is prospective with no saving provision, so legacy demands for earlier periods remain live.
No official clarification on the transition, or on the treatment of legacy demands raised for earlier periods, appears to have been issued. If you have historical exposure on this, it is a live question rather than a settled one.
Exports, refunds and the conditions that quietly fail
Exports of goods and services, and supplies to a special economic zone developer or unit for authorised operations, are zero-rated under Section 16 of the Integrated Goods and Services Tax Act. Two routes: supply under a letter of undertaking without paying integrated tax and claim refund of accumulated credit, or supply on payment of integrated tax and claim refund of the tax paid. Credit remains available either way.
A letter of undertaking is filed in Form RFD-11 and must be renewed for each financial year. Rule 96A imposes two conditions that end zero-rating if breached: goods must be exported within three months of the invoice, and payment for services must be realised in convertible foreign exchange within one year, failing which tax plus interest becomes payable.
For a service to be an export, five conditions in Section 2(6) must all hold: the supplier is in India, the recipient is outside India, the place of supply is outside India, payment is received in convertible foreign exchange or in rupees where the Reserve Bank permits, and the supplier and recipient are not merely two establishments of the same person. The third condition is precisely the one that Section 13(8)(b) used to defeat for intermediaries and no longer does. The fifth is the one that catches an Indian subsidiary billing its own foreign parent’s branch.
Since 1 October 2025, refund applications assessed as low risk receive 90% provisionally within seven days of acknowledgement, covering both zero-rated supplies and inverted duty structure. The mechanics of the inverted duty formula, including the point that input services are largely outside it, are covered in Guide 3.
Several changes made by the Finance Act 2026, including the statutory footing for provisional refunds on an inverted duty structure and the removal of the minimum export refund threshold, are enacted but expressed to take effect from a date to be notified. We could not find a commencement notification, and published material disagrees. Do not assume any of them is operative without checking.
Reverse charge: the entries that catch an ordinary buyer
Reverse charge turns your purchase into your tax liability. The entries most likely to apply to a business that does not think of itself as having a reverse charge problem:
- Goods transport agency services to a body corporate, registered person, factory, society or partnership, where the transporter has not opted for forward charge.
- Legal services from an individual advocate, senior advocate or firm of advocates to a business entity.
- Services by a director to the company, in a capacity other than employee.
- Security services, meaning supply of security personnel, from a person other than a body corporate to a registered person.
- Renting of any immovable property other than a residential dwelling by an unregistered person to a registered person. This entry was added with effect from 10 October 2024 and is the one most often missed, because the landlord is unregistered and therefore silent. Composition taxpayers were carved out from 16 January 2025.
- Sponsorship services, where the position changed on 16 January 2025: sponsorship supplied by a body corporate moved to forward charge, while sponsorship by individuals and others to a body corporate or partnership remains on reverse charge.
- Import of services, now materially wider because intermediary services received from abroad are caught from 30 March 2026.
Tax paid under reverse charge is generally creditable, so the exposure is usually interest, penalty and the effort of a correction rather than the tax itself. That is exactly why it goes unnoticed until an audit finds three years of it at once.
Post-sale discounts: useful relief, and one that is not in force yet
A circular issued on 12 September 2025 settled several questions that had been generating demands for years:
- Where a supplier issues a financial or commercial credit note, so that no GST liability is reduced, the recipient is not required to reverse credit attributable to that discount.
- A post-sale discount from a manufacturer to a dealer, where there is no arrangement between the manufacturer and the end customer, is an independent commercial pricing decision and is not part of the consideration for the dealer’s supply.
- Where the manufacturer has agreed a discounted price with the end customer and funds it through a credit note to the dealer, that amount is consideration and is includible in the value of the dealer’s supply.
- A discount that simply lets a dealer run its own promotion is not consideration for a separate supply of service. GST applies only where the dealer performs identified promotional services under an agreement for separately identifiable consideration.
What is not yet in force. The Finance Act 2026 omits the requirement in Section 15(3)(b)(i) that a post-supply discount be established by an agreement entered into at or before the time of supply and linked to specific invoices. That would be a substantial commercial relief, particularly for retrospective volume rebates. It is enacted and it is expressed to take effect from a date to be notified, and we could not establish that it has been notified. Until it is, the pre-supply agreement and invoice-linkage conditions continue to apply to a value-reducing credit note. See the flagged note in the previous section.
What to settle before entering a new state or a new line
Expansion decisions are where GST is cheapest to get right and most expensive to fix afterwards. The questions worth answering before the first invoice rather than after it:
- Does this need a registration in that state, or can it be supplied from where you are? A warehouse or a fixed establishment usually forces the answer. A sales team visiting from another state usually does not.
- What does the movement do to place of supply? Particularly where a customer directs delivery to a third location, or where goods move to your own premises in another state, which is a taxable supply between distinct persons.
- Does the new line create an exempt or inverted position? Either one changes the credit position for the whole entity, through apportionment in the first case and a refund claim in the second.
- Is there an Input Service Distributor consequence? A second state means common head office services now have to be distributed through an ISD registration rather than absorbed. See Guide 1.
- Does the contract survive the export test? For services to a foreign customer, place of supply and the establishment test in Section 2(6) do more damage than the rate ever does.
- What is the classification, and how confident are you? Where the answer is genuinely arguable and the amounts are material, an advance ruling before the first supply is far cheaper than a demand three years later, and the interim national appellate route now exists if two states disagree.
What an engagement on this looks like
Transaction and contract advisory
Rate, classification, place of supply and reverse charge settled before the contract is signed, with the reasoning documented so that it stands up three years later when someone asks.
Supply chain and structuring review
Where registrations, stock movements, billing flows and the Input Service Distributor structure sit, and what a change of footprint does to the credit position across the whole entity.
Sector-specific advisory
Work on the questions that only arise in a given sector: inversion in textiles and chemicals, specified premises in hospitality, works contract in construction, exports and intermediary status in services.
Send an enquiry
Tell us what you are about to do: a new state, a new product or service line, a contract with a foreign customer, or a classification you are not sure of. A partner replies within one business day.
This page is general information, not professional advice. Indian GST law changed substantially between 2024 and 2026, several changes are enacted but not yet notified into force, and how any of this applies depends on your own facts, your state and your sector. Take professional advice before acting on anything on this page. We are happy to be that adviser, but we do not act on a web page, ours or anyone else's, without one.