GST Rate Cut from 18% to 5%: Does It Trigger ITC Reversal Under Section 18(4)?
Introduction:
In a significant move, the GST Council has announced a reduction in the Goods and Services Tax (GST) rate from 18% to 5% on certain goods, effective from September 22, 2025. This change has raised questions among businesses regarding the reversal of Input Tax Credit (ITC) under Section 18(4) of the Central Goods and Services Tax (CGST) Act, 2017.
Understanding ITC Reversal Under Section 18(4):
Section 18(4) of the CGST Act mandates the reversal of ITC in the following scenarios:
- Opting for the Composition Scheme (Section 10): If a registered person opts for the Composition Scheme, they must reverse the ITC availed on inputs and capital goods.
- Supply Becomes Wholly Exempt: If the outward supply of goods or services becomes wholly exempt from GST, the ITC availed on inputs and capital goods must be reversed.
However, a mere reduction in the GST rate does not qualify as a supply becoming wholly exempt. The supply remains taxable, albeit at a lower rate. Therefore, ITC reversal under Section 18(4) is not triggered by a rate reduction alone.
Clarification from Tax Experts:
Tax professionals and experts have clarified that the reduction in GST rate from 18% to 5% does not necessitate the reversal of ITC under Section 18(4). The key factor is whether the supply becomes wholly exempt, which is not the case in a rate reduction scenario. Therefore, businesses can continue to avail and utilize ITC without the need for reversal due to the rate change.
Conclusion:
The recent GST rate reduction from 18% to 5% does not trigger ITC reversal under Section 18(4) of the CGST Act, as the supply remains taxable. Businesses should continue to avail and utilize ITC as per the existing provisions, unless the supply becomes wholly exempt or the Composition Scheme is opted for.
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