This article presents a practical conversation between the fictional characters Arjuna and Krishna, simplifying the complex implications of GST rate changes for businesses. Through their dialogue, key issues are addressed, such as how reduced or nil GST rates affect Input Tax Credit (ITC), whether refunds of accumulated ITC are possible under the inverted duty structure, treatment of compensation cess, and how stock around the rate-change date should be taxed. Krishna explains that while ITC already claimed can generally continue to be utilized when rates are reduced with ITC, it must be reversed when goods become nil-rated or exempt. He also highlights the restrictions on refunds, the need to follow time of supply provisions, and the importance of careful documentation. The overarching lesson for businesses is to remain compliant, adopt conservative planning, and ensure smooth transitions in accounting and cash flow management during GST rate changes.
Arjuna (Fictional Character): What should businesses keep in mind when the GST rate on their goods is reduced, or when the goods become Nil-rated or Exempt?
Krishna (Fictional Character): The key point is that a rate reduction directly affects the tax payable on outward supplies. Businesses must also examine whether the Input Tax Credit (ITC) already claimed on purchases made before the change can still be utilized or needs to be reversed, depending on eligibility under GST law. Additionally, care should be taken to determine whether the old rate or the new rate applies, based on the provisions of time of supply under GST.
Arjuna (Fictional Character): Krishna, the GST rate on our goods is falling let's say to 5% (with ITC) from 12%/18% w.e.f 22nd September 2025. What happens to input tax credit (ITC) we already took on Inputs and Capital Goods?
Krishna (Fictional Character): Arjuna! ITC on purchases made before the rate change and the ITC claimed is not restricted to the reduced rate. As per provisions of the GST Act, you are eligible for full Input Tax Credit of the tax actually charged on the purchases made subject to normal eligibility criteria. Once ITC is duly availed in the GST returns and appears in your E-credit Ledger, you can continue to utilise it for outward tax liabilities, even if the outward rate later reduces. Therefore, ITC on inputs and Capital Goods can be continue to utilize. The rate cut does not, by itself, dilute credit already taken.
Arjuna (Fictional Character): We have also heard about the inverted duty structure refunds. Can we claim refund of the accumulated ITC for supplies made up to the effective date 22.09.2025?
Krishna: Refund of accumulated ITC under the inverted duty structure as per provision of GST Act is for cases where input tax rate is higher than output tax rate. If the same goods attracting different rates at different points in time, refund is generally not available as per Circular No. 135/05/2020 GST dated 31.03.2020, as amended. However, it's a litigative matter, some courts have taken a favourable view that the ITC on such accumulated balance due to rate change on Inputs should be allowed. So, plan conservatively. However, accumulated Input Tax Credit balance of capital goods would not be eligible for refund under inverted duty structure.
Arjuna (Fictional Character): Krishna, what if the GST rate on our goods is falling let's say to 5% (without ITC) or becomes Nil from 12%/18% w.e.f 22nd September 2025. What happens to input tax credit (ITC) we already took on Inputs and Capital Goods?
Krishna (Fictional Character): Arjuna! ITC on purchases made before the rate change and the ITC claimed is now here restricted. As per provisions of the GST Act, you are not eligible to utilize the credit where ITC is not allowed to set-off against outward tax liability. Therefore, the liability in such case needs to be paid in cash and credit needs to be reversed. Therefore, ITC need to be reversed. Similarly, when the goods have become nil rated or exempted the ITC of the same is not eligible to be utilised or claimed so need to be reversed. Also, the refund of the same is not eligible to be claimed in such cases.
Arjuna (Fictional Character): What happens to the compensation cess? As the compensation cess is now removed will I get the accumulated balance of compensation cess as refund or will become my cost?
Krishna (Fictional Character): As per CBIC Notification No. 02/2025 Compensation Cess dated 17/09/2025, Compensation Cess will be Nil. Thus, the dealers have to reverse ITC of Compensation Cess on stock in hand as on 22.09.2025.
Arjuna (Fictional Character): What about stock on 22.09.2025? How do we tax sales around the rate change date?
Krishna (Fictional Character): Arjuna, follow Section 14 of the CGST Act, change in rate provisions to determine the time of supply using the dates of supply, invoice, and payment. Accordingly, you should apply the old and new rates as per the provisions.
Arjuna (Fictional Character): Krishna, what is the key lesson businesses should learn from this GST rate change?
Krishna (Fictional Character): The main takeaway is to remain compliant and well-prepared. Businesses should claim and utilize ITC strictly as allowed under the law, reverse credit wherever required and apply the correct tax rate based on the time of supply provisions of the CGST Act. Refunds should not be expected unless clearly permitted, as policy and circulars generally restrict them. Above all, proper documentation and conservative planning are essential so that the transition to the new rate is smooth for books, systems, and cash flows.
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