GST 2.0, one year on. Rates to re-check now.
A review list for foreign-owned businesses in India
Four slabs became two, plus 40%
The 12% and 28% slabs are gone. A 40% rate covers a short list of luxury and sin goods. Compensation cess has ended for most goods.
Check every HSN code again
Review product masters, price lists and contract price clauses, not just invoices.
Watch for credit piling up
If you now sell at 5% but still buy inputs or services at 18%, unused credit builds up. That is an inverted duty structure.
- Model your credit position for each product line
- File refund claims on time, with clean supporting data
Group charges and exports
- Services from your parent (management fees, IT support, royalties) attract GST under reverse charge, usually at 18%
- Intermediary services to overseas clients: from 1 April 2026 the place of supply follows the recipient, so they can qualify as exports
- Exporting without paying tax? Renew your Letter of Undertaking (Form RFD-11) for 2026-27
Other changes in the past year
Five checks before the next return
Delhi Legal Company
A year after "GST 2.0" took effect on 22 September 2025, India's GST runs mainly on two rates, 5% and 18%, with a 40% rate for a short list of luxury and sin goods. For foreign-owned businesses, the rate cut was only the start. Since then, compensation cess has ended for tobacco (1 February 2026), the Finance Act, 2026 has removed the special place-of-supply rule for intermediaries (from 30 March 2026) and relaxed post-sale discounts, the GST Appellate Tribunal has started work, and the 57th GST Council meeting on 8 October 2026 approved wide compliance, refund and export-of-services reforms without changing rates. Every foreign-owned company should now re-check its HSN and SAC codes, rates, contracts, input tax credit position and export claims.
1Why a one-year re-check matters
When the GST Council announced the rationalisation of rates at its 56th meeting on 3 September 2025, the headlines were about cheaper cars, air conditioners, medicines and insurance. For most businesses, the change was implemented in a rush: product masters were updated, price lists revised and invoices re-coded within three weeks.
Rushed changes leave errors behind. A year later, we regularly see foreign-owned Indian companies with products still mapped to old HSN entries, intercompany service invoices at the wrong rate, unused credit trapped in inverted structures, and contracts that never passed on (or recovered) rate changes. At the same time, several important changes arrived after the rate cut, especially for companies that provide services to their overseas parent or group.
Foreign-owned businesses face particular exposure because so much of their activity is cross-border or between related parties: imports from the parent, services to group companies abroad, royalty and management fee payments, cross-charges between Indian offices and secondment of staff. Each of these has its own GST treatment, and several have shifted since September 2025.
Who this guide is for: Indian subsidiaries, branches and project offices of foreign groups, global capability centres (GCCs), captive IT and back-office units, importers and distributors of foreign brands, and manufacturers with foreign shareholders.
2The GST 2.0 timeline: September 2025 to October 2026
- 3 Sep 2025
56th GST Council meeting recommends a two-rate structure, a 40% de-merit rate, and reforms on intermediary services, post-sale discounts, provisional refunds and the GST Appellate Tribunal. - 17 Sep 2025
Rate notifications for goods and services issued. - 22 Sep 2025
New rates take effect for goods (other than pan masala and tobacco products) and services. - Late 2025
GST Appellate Tribunal begins accepting appeals on a staggered schedule. - 1 Feb 2026
Compensation cess on tobacco ends. Higher central excise duty on tobacco and a new cess on pan masala manufacturing capacity take effect to maintain the tax burden. - 30 Mar 2026
Finance Act, 2026 enacted. Section 13(8)(b) of the IGST Act (intermediary place of supply) is omitted from this date; provisions on post-sale discounts and refunds take effect from dates to be notified. - 30 Jun 2026
Deadline to file GST Appellate Tribunal appeals against orders communicated before 1 April 2026. - 8 Oct 2026
57th GST Council meeting: no rate changes, but major reforms on registration, refunds, input tax credit, export of services, litigation and penalties. Rate changes will be considered once a year at a dedicated meeting.
3The new rate structure
Before September 2025, GST had four main rates (5%, 12%, 18% and 28%), with compensation cess on top for luxury and sin goods. GST 2.0 collapsed this into a simpler structure:
| Rate | Before 22 Sep 2025 | From 22 Sep 2025 |
|---|---|---|
| Nil / exempt | Essential items and specified services | Expanded: for example individual life and health insurance, 33 life-saving drugs, UHT milk, paneer and Indian breads |
| 5% (merit rate) | Essential goods | Most former 12% items and many 18% consumer items |
| 12% | A wide range of goods and services | Largely removed; retained only for a few items such as bricks and tiles |
| 18% (standard rate) | Most goods and services | Standard rate, now also covering most former 28% goods |
| 28% + cess | Luxury, durables and sin goods | Removed for most goods |
| 40% (de-merit rate) | Not applicable | Pan masala, tobacco products, aerated and sugary drinks, high-end cars, yachts and private aircraft |
| Special rates | 0.25%, 1.5%, 3% for diamonds, stones and gold | Continue |
Compensation cess has been withdrawn on goods other than tobacco items, and was finally discontinued for tobacco from 1 February 2026, replaced by additional central excise duty and a new cess on pan masala.
4Key goods rate changes by sector
The table below summarises the most significant changes for sectors where foreign-owned companies are active. Always confirm the rate for your specific HSN code against the notifications, as entries are often split by description, value or use.
| Sector | Products | Old rate | New rate |
|---|---|---|---|
| Consumer durables | Air conditioners, LED/LCD TVs above 32 inches, dishwashers | 28% | 18% |
| Automotive | Small cars, motorcycles up to 350cc, auto parts | 28% (+ cess on vehicles) | 18% |
| Automotive | High-end cars | 28% + cess | 40% (no cess) |
| Building materials | Cement | 28% | 18% |
| Textiles | Man-made fibre / man-made yarn | 18% / 12% | 5% |
| Healthcare | Medical, dental and veterinary devices | 18% | 5% |
| Healthcare | 33 life-saving drugs and diagnostic kits | 12% | Nil |
| Healthcare | Spectacles and corrective goggles | 28% | 5% |
| FMCG | Soaps, shampoos, toothpaste and toothbrushes | 12% / 18% | 5% |
| Packaged food | Sauces, pasta, chocolate, coffee, namkeen | 12% / 18% | 5% |
| Agriculture | Tractors, harvesters and irrigation equipment | 12% | 5% |
| Energy | Natural gas | 12% | 18% |
| Beverages | Aerated and sugary drinks | 28% + cess | 40% |
Not every rate went down. Natural gas went up, and some products were moved between entries. An importer or manufacturer that assumed "everything at 28% is now 18%" may have under-charged tax on goods that were reclassified or placed in the 40% bracket.
5Key services rate changes
| Service | Position after GST 2.0 | Points for foreign-owned companies |
|---|---|---|
| Individual life and health insurance | Exempt (previously 18%) | Group policies for employees are treated differently; check your employee benefit policies. |
| Hotel accommodation up to ₹7,500 per night | 5% without input tax credit (previously 12%) | Business travel costs fall, but the hotel cannot pass on credit, so there is no credit for the company either. |
| Gyms, salons, yoga and similar services | 5% without input tax credit (previously 18%) | Relevant for employee wellness programmes. |
| Goods transport agency | Option of 5% without credit or 18% with credit | Review which option your logistics providers use and the effect on reverse charge. |
| Passenger transport | Similar two-rate option | Affects employee transport contracts. |
| Job work | Reduced for specified sectors; residual job work at 18% | Contract manufacturers should re-check rates. |
| IT, consulting, professional and most B2B services | 18% (unchanged) | The main rate for most intercompany services remains 18%. |
6The intermediary change: a big win for captive centres
For many foreign-owned companies, the most valuable change of the past year is not a rate cut at all. It is the removal of the special place-of-supply rule for intermediary services.
6.1 The old problem
Under Section 13(8)(b) of the IGST Act, the place of supply for "intermediary services" was the location of the supplier, that is, India. An intermediary is a broker, agent or other person who arranges or facilitates supplies between two or more persons. Tax authorities frequently argued that Indian subsidiaries providing sales support, marketing support, procurement assistance, customer liaison or similar services to foreign group companies were "intermediaries". The result was that these services were not treated as exports: GST of 18% was payable even though the client was abroad and paid in foreign currency, and accumulated input tax credit could not be refunded. This was one of the most litigated issues in Indian GST.
6.2 The 2026 fix
The 56th GST Council recommended moving intermediary services to the general rule, and the Finance Act, 2026 omitted Section 13(8)(b). Because the amending provision does not specify a separate commencement date, it is generally understood to apply from 30 March 2026, the date of Presidential assent. Intermediary services now follow the default rule: the place of supply is the location of the recipient.
6.3 What it means in practice
- Export status is possible. Services to a foreign recipient can qualify as an export of services, provided all conditions are met: 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 Indian rupees where permitted by the RBI), and supplier and recipient are not merely establishments of the same person.
- Zero-rating. Exports can be made under a Letter of Undertaking (LUT) without paying IGST, or with IGST paid and refunded.
- Refunds of accumulated credit. Companies that previously paid GST on intermediary services should review whether input tax credit can now be refunded for supplies after 30 March 2026.
- Reverse charge on the other side. Indian businesses that receive services from foreign intermediaries, such as overseas agents and brokers, may now be liable to pay GST under reverse charge as an import of services. This matters especially in sectors where credit is restricted.
Past periods are not automatically resolved. The omission applies prospectively. Notices and disputes for earlier periods continue to be decided under the old provision, so keep defending pending cases on their merits. Also check the "merely establishments of the same person" condition: a branch or liaison office of a foreign company providing services to its own head office cannot claim export status.
The 57th GST Council has since gone further, recommending that services supplied to a foreign client through the Indian firm's own overseas branch, and services such as testing, repair or certification performed in India on a foreign client's goods, be treated as exports. These recommendations need legal amendments and notifications before they apply.
7Cross-border transactions with the parent
Beyond the intermediary change, foreign-owned companies should re-check the GST treatment of every recurring flow with the group:
| Transaction | GST treatment | What to re-check |
|---|---|---|
| Import of goods from the parent | IGST at the applicable rate at customs, creditable | New rate on the HSN code; customs classification aligned with the GST rate |
| Royalty, brand and technology fees paid abroad | Import of services; GST under reverse charge, generally 18% | Reverse charge self-invoices and payment; credit availed correctly. See our royalty agreements service. |
| Management fees and shared services from the parent | Import of services under reverse charge | Valuation where the recipient is entitled to full credit; documentation of services |
| Secondment of overseas staff | Following the Supreme Court's 2022 ruling in Northern Operating Systems, often treated as a supply of manpower by the parent, taxable under reverse charge | Secondment structure, salary reimbursements and documentation |
| Services from the Indian company to group entities abroad | Export of services if all conditions are met; otherwise 18% | Intermediary analysis, LUT filed for the year, foreign exchange realisation |
| Corporate guarantees by the parent or the Indian company | Taxable services between related parties, with special valuation rules for guarantees given to related parties | Whether a guarantee fee or deemed value applies |
| Cross-charges between Indian offices in different states | Distinct persons; common input services distributed through an Input Service Distributor (mandatory since 1 April 2025) | ISD registration and monthly distribution |
Related-party supplies are valued under special rules (generally open market value, or 90% of the price charged to unrelated customers for goods supplied to an agent), although where the recipient is entitled to full input tax credit, the invoice value is often accepted. Align your GST positions with your transfer pricing documentation; inconsistencies are a common audit trigger.
8Input tax credit and inverted duty after the rate cut
8.1 The inverted duty problem
When output rates fell (for example from 18% to 5% for many consumer and medical goods), many businesses ended up paying more GST on their inputs than they collect on their outputs. Unused credit builds up in the electronic credit ledger. A refund of this accumulated credit is possible under the inverted duty structure rules, but with important limits:
- The refund formula historically covered credit on input goods only, not input services or capital goods.
- Refunds are generally not available where the input and output are the same goods taxed at different rates at different times, which is relevant for stock bought before 22 September 2025 and sold after.
- Certain goods are notified as ineligible for inverted duty refunds.
8.2 What has changed and what is coming
| Change | Status |
|---|---|
| 90% provisional refund for zero-rated supplies (exports) | Operational Risk-based provisional refunds |
| 90% provisional refund for inverted duty refunds | Enacted Finance Act, 2026; effective from a date to be notified |
| Refund to include credit on input services | Recommended 57th Council, for credit availed on or after 1 November 2026 |
| Refund of credit on plant and machinery for exporters and inverted-rate businesses | Recommended 57th Council, spread at one-sixtieth per month, for credit availed on or after 1 April 2027 |
| No minimum refund amount for IGST on exports of goods | Enacted Finance Act, 2026; date to be notified |
8.3 New credits recommended
The 57th GST Council also recommended making credit available on several items that were previously blocked, including health and life insurance for employees, telecommunication towers, pipelines laid outside the factory, free samples, and stock written off on expiry where the law requires destruction. These changes need amendments and notifications before they can be claimed, but foreign-owned employers with large insured workforces should track them closely.
9Post-sale discounts and credit notes
Foreign brands that sell through Indian distributors, retailers and e-commerce platforms commonly give volume rebates, target-based incentives and year-end discounts. Under the old law, such post-sale discounts could reduce the taxable value only if they were agreed before or at the time of supply and linked to specific invoices. This forced many businesses to issue "commercial credit notes" without GST effect.
The Finance Act, 2026 amends Sections 15 and 34 of the CGST Act to remove the pre-agreement requirement. Post-sale discounts can be given through GST credit notes, provided the recipient reverses the corresponding input tax credit. This provision applies from a date to be notified, so continue the existing practice until it is in force, but start preparing distributor agreements and systems now.
Practical tip: when the new rule takes effect, the supplier's ability to reduce its tax liability will depend on the customer reversing credit. Build a confirmation step into your credit note process, and review your vendor and distributor compliance procedures.
10The 57th GST Council: what changes next
The 57th meeting of the GST Council on 8 October 2026 did not change any rates. Instead, it approved a long list of compliance and taxpayer-facing reforms. Most require legal amendments, rules or system changes, so implementation will be phased. Key recommendations for foreign-owned businesses:
Registration
Automatic registration within three working days for low-risk applicants; automatic acceptance of certain amendments such as additional places of business and changes of directors.
Refunds
Acknowledgement within 10 days, 90% provisional sanction within 3 working days of acknowledgement, automatic refund of excess cash balance, and forms pre-filled with customs and banking data.
Export of services
Export benefit for services supplied through the firm's own overseas branch, and for testing, repair and similar work in India on foreign clients' goods.
Returns
Ability to reduce previously reported supplies and correct earlier periods, including wrong buyer GSTINs, with credit settled through the Invoice Management System.
Litigation and penalties
No notices for amounts below ₹10,000, standard procedures for notices and hearings, removal of the power of arrest, higher prosecution threshold of ₹5 crore and a lower general penalty.
Goods in transit
Vehicles to be stopped only on specific intelligence with senior authorisation, and only by the origin and destination states.
The Council also decided that rate changes will in future be considered once a year at a dedicated meeting, which should give businesses more predictability in pricing and contract planning.
11Disputes and the GST Appellate Tribunal
For years, GST disputes beyond the first appeal had nowhere to go except the High Courts, because the GST Appellate Tribunal (GSTAT) had not been constituted. The GSTAT began accepting appeals in late 2025 on a staggered schedule. Appeals against orders communicated before 1 April 2026 had to be filed by 30 June 2026; orders communicated from 1 April 2026 follow the normal three-month limit.
A pre-deposit is required to appeal: generally 10% of the disputed tax at the first appeal stage and a further amount at the Tribunal stage, subject to statutory caps. Foreign-owned companies with pending intermediary, export refund, secondment or valuation disputes should review their litigation calendar, confirm that every appeal was filed in time, and consider whether the legislative changes described above strengthen their position.
Anti-profiteering provisions also deserve a mention. With large rate reductions, the Government expected businesses to pass on the benefit to consumers. New anti-profiteering applications have not been accepted since 1 April 2025, but pricing decisions made at the time of the rate cut remain relevant to consumer protection and reputational risk.
12Common errors we are seeing one year on
13The one-year GST re-check checklist
Rates and classification
- Reconcile every HSN and SAC code in your item master with the current rate notifications.
- Confirm the classification used at customs matches the GST classification for imports.
- Check for products in the 40% bracket or with changed entries.
Cross-border and group transactions
- Re-assess services to foreign group companies under the post-30 March 2026 intermediary rules.
- File the Letter of Undertaking for the current year and track foreign exchange realisation.
- Review reverse charge on royalties, management fees, secondments and other imported services.
- Align GST valuation with transfer pricing documentation.
Credits and refunds
- Quantify accumulated credit and file inverted duty or export refund claims within time.
- Track notification of the 90% provisional refund for inverted duty and the new credit eligibility items.
- Confirm Input Service Distributor registration and monthly distribution for multi-state operations.
Contracts, disputes and governance
- Update distributor agreements for the new post-sale discount rules.
- Add tax-change clauses to customer and supplier contracts.
- Review pending notices and appeals, and confirm GSTAT filings.
- Report GST positions in the monthly MIS to headquarters.
14How Delhi Legal Company can help
Delhi Legal Company provides GST registration, compliance, refund and advisory support to foreign-owned businesses across India, together with the accounting, tax and FEMA services that sit alongside it.
15Conclusion
GST 2.0 made the rate structure simpler, but the year since has shown that simplicity at the top hides plenty of detail underneath. For foreign-owned businesses, the changes that matter most are not always the headline rate cuts. The end of the intermediary rule, the new approach to post-sale discounts, faster refunds and the reforms approved at the 57th Council meeting can all change the GST cost of operating in India.
Now is the right time for a structured re-check: confirm that every product and service is taxed at the correct rate, that cross-border and group flows are treated correctly, that trapped credit is being recovered, and that contracts and systems are ready for the reforms still to be notified.
Book a GST health check
Our team will review your rates, classification, group transactions, credits and refunds, and give you a prioritised list of corrections and savings.
Call +91-9599332456 | Email info@delhilegalcompany.com
?Frequently asked questions
What is GST 2.0?
GST 2.0 is the popular name for the rationalisation of GST rates recommended by the 56th GST Council meeting and effective from 22 September 2025. It replaced the four main rates with two (5% and 18%) and a 40% rate for selected luxury and sin goods.
Has the GST Council changed rates again since September 2025?
No general rate changes were made at the 57th GST Council meeting on 8 October 2026. The Council decided that rates will be reviewed once a year at a dedicated meeting.
Is compensation cess still payable?
No. Compensation cess was withdrawn on most goods from 22 September 2025 and on tobacco products from 1 February 2026, when higher central excise duty on tobacco and a new cess on pan masala took effect.
Can an Indian subsidiary now export intermediary services to its foreign parent?
Since Section 13(8)(b) of the IGST Act was omitted with effect from 30 March 2026, the place of supply of intermediary services is the recipient's location. Services to a foreign recipient can qualify as exports if all export conditions are met, including receipt of payment in foreign exchange.
Does the intermediary change apply to past periods?
Generally no. It applies from 30 March 2026. Disputes for earlier periods are decided under the law that applied at that time.
Is GST payable on royalties paid to a foreign parent?
Yes, as an import of services under reverse charge, generally at 18%. The Indian company pays the tax and can usually claim it as input tax credit.
Can we get a refund of credit accumulated because of the rate cut?
An inverted duty refund may be available for credit on input goods, subject to conditions and exclusions. Refunds of credit on input services and capital goods have been recommended by the 57th Council for future periods but are not yet in force.
When do the new post-sale discount rules apply?
The Finance Act, 2026 amended the law to allow post-sale discounts through credit notes without prior agreement, provided the recipient reverses credit. The change applies from a date to be notified.
Is the GST Appellate Tribunal working?
Yes. It began accepting appeals in late 2025. Appeals against orders communicated before 1 April 2026 had to be filed by 30 June 2026; later orders follow the normal three-month limit.
Do the 57th GST Council decisions apply immediately?
Most are recommendations that need amendments to the GST laws, rules, notifications or the GST portal. Track official notifications before acting on them.
Disclaimer: This article reflects the position as at 12 October 2026 and is provided for general information only. It does not constitute tax or legal advice or create a professional relationship. GST rates are notified at the level of individual HSN and SAC entries, several Finance Act, 2026 amendments take effect only from dates to be notified, and the recommendations of the 57th GST Council meeting require legal and system changes before they apply; please verify the current position against the official notifications and consult a qualified professional before acting. In accordance with the rules of the Bar Council of India, this content is not intended as advertisement or solicitation.