The GST Council, as widely expected, moved to a two-slab indirect tax system by retaining the 5% and 18% rates and doing away with the 12% and 18% slabs. The GST Council has been maintaining the four-slab structure since 2017, when the indirect tax system was first introduced.
The GST was essentially described as a “one nation, one tax” reform. One of its most important features is the Input Tax Credit (ITC) mechanism, which prevents people from paying tax multiple times on the same product or service.
ITC and the new GST regime
Under the new GST framework, businesses can still claim ITC on purchases made before September 22, 2025, even if those transactions were taxed at the earlier rates. Similarly, if a company’s output is now taxed at a lower rate, it can continue using accumulated ITC from the higher rate period to pay its current liabilities.
Job work services in sectors such as pharmaceuticals and leather have also been placed under a concessional 5% GST slab, with the Council specifically clarifying that ITC will continue to be available in these cases. In general, ITC eligibility under Section 16 of the CGST Act remains intact for goods and services used in the course of business, provided that suppliers have paid their share of tax and invoices are in order. Refunds of accumulated ITC in inverted duty situations, where inputs attract higher tax than outputs, also continue to be permitted, except for some restricted items.
However, there are important exceptions where ITC is no longer allowed. If a product or service has been shifted into the exempt category under GST, for example, UHT milk, packaged Indian breads or certain healthcare products, businesses can no longer claim ITC for supplies made after September 22.
Passenger transport services such as economy-class air travel and most rail and bus tickets are taxed at 5 % but without ITC, unless operators opt for the higher 18% slab with credit. Goods Transport Agencies (GTAs) also face similar rules: the default 5% rate comes without ITC, though opting for 18% enables full credit. Similarly, the insurance sector has been reduced from 18% to 0% without ITC.
“Without the availability of Input Tax Credit, insurers are likely to experience higher operational costs, which, if passed on unchecked, could dilute or even negate the intended benefit for consumers. To safeguard policyholders, the government and regulators may need to consider mandating greater transparency in premium pricing, requiring insurers to disclose the extent of cost savings actually being transferred.” Dinesh Jotwani, Co-Managing Partner, Jotwani Associates, told financialexpress.com. Ultimately, unless supported by regulatory oversight and ethical industry practices, the GST exemption risks becoming a nominal relief rather than a substantive financial benefit for the public, he added.
Other consumer-facing services have seen rate cuts paired with restrictions. Beauty and wellness services, including salons, gyms and spas, now fall under the 5% slab but cannot claim ITC. Hotel accommodation below Rs 7,500 a night is also taxed at 5% without ITC. Multimodal goods transport has been fixed at 5% with limited ITC, unless air transport is part of the service, in which case the rate is 18% with full credit.
“While the government’s reduction of GST rates in sectors such as beauty and wellness, hospitality, multimodal transport, and insurance appears consumer-friendly on the face of it, the denial of input tax credit (ITC) distorts the fundamental principle of GST as a value-added tax and breaks the chain of credit. In practice, businesses in these sectors will be unable to offset their input costs, thereby increasing their effective tax burden, which is ultimately passed on to consumers through higher prices or reduced service quality.” Sonam Chandwani, Managing Partner, KS Legal and Associates, commented. Thus, instead of actual cost savings to end-users, the move may operate as a notional reduction, creating hidden inflationary pressure and undermining the neutrality of GST, while also raising concerns of inconsistency and potential arbitrariness in the government’s rate and credit policy, she added.
What exactly is ITC?
Input Tax Credit simply means that when a business pays tax on purchases, it can adjust that amount against the tax it collects on sales. In other words, you don’t pay tax twice; you only pay the difference.
Suppose a trader buys raw materials worth Rs 1,000 and pays Rs 180 as GST. Later, he sells the finished goods for Rs 2,500 and charges his customer Rs 450 as GST. Without ITC, he would have to pay the full Rs 450 to the government.
With ITC, he can claim credit for the Rs 180 already paid on purchases. So, the actual GST he needs to pay is only Rs 270 (Rs 450 – Rs 180). This makes the system fairer and avoids double taxation.
Who can claim ITC?
Only GST-registered businesses can claim ITC. To be eligible, they must:
- Possess a valid GST invoice,
- Have received the goods or services,
- Ensure their supplier has deposited GST with the government,
- File GST returns regularly.
Why is ITC important?
ITC is important for a variety of reasons. Businesses don’t have to pass on the full tax on to he customers, thereby keeping the prices low. Furthermore, this also helps in avoiding levying tax on the same good twice. Companies also prefer buying from GST-compliant suppliers to avail ITC, therefore reducing dealings in black.