GST 2.0 – Impact on financial reporting

Effective 22 September 2025, the government has brought some significant changes to the existing Goods and Services Tax (GST) law. The latest landmark reforms, being referred to as GST 2.0, represent the most significant step aiming at rationalization of rates and simplification of the GST law since its introduction in 2017. The amendments are expected to simplify compliance, minimize cascading tax effects, make essential goods and services more accessible to the common man, and enhance global competitiveness of the Indian industry. While welcoming the amendments made in the law, we look at its key financial reporting implications in this article.

Key amendments are:

• Rationalization of a four-tiered tax rate structure into a two-tiered rate structure with a standard rate of 18% and a merit rate of 5%. A special de-merit rate of 40% applies for a select few goods and services
• Certain goods and services have moved from taxable to exempt/ nil GST rate category. Examples include products such as Ultra-High Temperature (UHT) milk, pre-packaged and labelled chena or paneer and all Indian breads. Services like individual life and health insurance have been exempted.
• A number of goods and services have moved from a higher GST rate to a lower GST rate. In some cases, services have been moved to a lower tax rate category with the condition that no input tax credit (ITC) will be allowed. For example, hotel accommodation having value of supply of a unit of accommodation less than or equal to INR7,500 per unit per day will attract GST @ 5% without any ITC, instead of GST @ 12% with ITC or beauty and physical well-being services will attract GST @ 5% without any ITC, instead of GST @ 18% with ITC.
• Compensation Cess applicable on certain goods has been abolished except in case of tobacco and tobacco products.
• Certain goods and services have moved from lower GST to higher tax rate such as aerated waters, caffeinated and carbonated beverages.
• The GST Appellate Tribunal (GSTAT) has become operational for accepting appeals from September 2025 and is expected to commence hearing before the end of December 2025.
• The place of supply of intermediary services is being shifted from the supplier’s location to the recipient’s location. Consequently, services provided to a person outside India will qualify as exports (zero-rated), while services received in India from a person outside India will be taxable under the reverse charge mechanism.
• The requirement of establishing post-sale discount in terms of an agreement entered into before or at the time of such supply and specifically linking of the same with relevant invoices, is to be omitted.
• Sanction of risk-based provisional refund to facilitate refund claims on account of zero-rated supply of goods or services. Similarly, provisional refund provisions will be introduced for refund on account of inverted tax structure.

The changes in GST rates of all goods except pan masala, gutkha, cigarettes, chewing tobacco products like zarda, unmanufactured tobacco and bidi, are applicable from 22 September 2025. Pan masala, gutkha, cigarettes, chewing tobacco products like zarda, unmanufactured tobacco and bidi will continue at the existing rates of GST and compensation cess, where applicable. The new rates for these items will be implemented at a later date to be notified, based on discharging of entire loan and interest liabilities on account of compensationces

Key impact of changes requiring financial reporting implications

We believe the above changes to GST law, particularly those related to tax rates, will have the following impact on entities requiring financial reporting evaluation:

1. Goods/ services moved from taxable to exempt/ nil rate category

It is a settled position under GST that except for cases such as export and supply to SEZ (i.e., zero rated supply), no ITC can be availed for GST paid on inputs used in production of goods or services which are either exempt from applicability of GST or are taxed at nil-rate. Similarly, no ITC can be availed for GST paid on procurement of services attributable to outward supply which are exempt or are taxed at nil rate. In case input goods or services are used both for exempt/ nil-rated supplies as well as taxable supplies, proportionate amount of ITC, determined based on value of supply of respective goods or services during the period, will have to be reversed.

2. ITC availed on capital assets initially used in the manufacture of taxable goods and such goods are subsequently exempted:

Under the GST Act, all capital assets are deemed to have a useful life of 60 months, irrespective of the useful life prescribed under the Companies Act, 2013 (as amended) and useful life of the asset used for financial reporting purposes. If capital assets were initially purchased for use in manufacture of taxable goods and goods are subsequently moved to exempt category, proportionate ITC for the unexpired life must be reversed.

3. Abolition of Compensation Cess:

Suppliers such as car dealers were previously paying compensation cess on purchase of motor vehicles in addition to GST. They were also required to collect and pay compensation cess on sale of motor vehicles. Compensation cess paid on purchase can be offset only against compensation cess payable on sale and not against GST payable on sale. With the recent GST amendments, the compensation cess has been completely abolished. This implies that any unutilized balance of Compensation Cess may remain unrealized, unless further relaxations are introduced for the impacted entities.

4. Goods/ services will be taxed at a lower rate going forward and inputs continue at higher rate of GST

If goods/ services move from a higher to a lower tax bracket, ITC continues to be available, though for services in many cases in lower tax bracket no ITC is also available. However, its recoverability may become a key question due to applicability of lower output tax. It may be noted that refund in case of inverted tax structure is not available for GST paid on procurement of services

Financial reporting implications

Considering the above, entities impacted by GST changes will need to revisit recognition of GST ITC either because sale of final product has become exempt, or ITC can no longer be utilized because of lower GST on supply. If there is a need to reverse/ write-off ITC, the following key accounting questions arise:

1. Whether the amount should be charged to the Statement of Profit and Loss or can it be added to cost of inventory/ property, plant and equipment?
2. If the amount is capitalized to the cost of property, plant and equipment, should depreciation be charged prospectively or retrospectively?

Our perspective on the above questions is given below:

Whether the amount of ITC reversed/ written off should be charged to the Statement of Profit and Loss or can it be added to cost of inventory/ property, plant and equipment

If the underlying goods/ items of property, plant and equipment on which ITC is being reversed/ written-off are no longer in existence because they are already, fully utilized or otherwise impaired, then it is obvious that the amount of ITC reversed/ written off should be charged to the Statement of Profit and Loss. However, if the underlying goods/ items of property, plant and equipment are still in existence with the entity, then the following two views seem possible:

View 1

The amount of ITC reversed/ written-off is added to the cost of inventory/ property, plant and equipment. This view can be supported by the following key arguments.

1. In accordance with Ind AS 2 Inventories and Ind AS 16 Property, Plant and Equipment, the cost of acquiring inventory and items of property, plant and equipment, respectively, comprises, among other items purchase price, import duties and other taxes other than those subsequently recoverable by the entity from the taxing authorities. In this case, the reversal/ write-off of ITC is akin to a change in an accounting estimate. In accordance with paragraph 37 of Ind AS 8 Accounting Policies, Changes in Accounting Estimates and Errors, to the extent that a change in an accounting estimate gives rise to changes in assets and liabilities, it will be recognized by adjusting the carrying amount of the related asset or liability in the period of the change
2. The recently issued opinion by the Expert Advisory Committee (EAC) of the ICAI on Accounting treatment of additional capitalisation arisen due to arbitration award provides an analogy, noting that disputed amounts finalized later are akin to changes in estimates and should be capitalized and depreciated prospectively
3. Attention is invited to the earlier Guidance Note on Accounting for State-level Value Added Tax, issued by the Institute of Chartered Accountants of India (ICAI), to deal with accounting for state-level Value Added Tax. The said Guidance Note, provided below, deals with similar situations. It has since been withdrawn because Value Added Tax is no longer in existence. One may argue that despite withdrawal, the same principles should continue to apply.

“29. If, on the other hand, the amount utilised pertains to disallowance/ withdrawal of VAT credit taken on purchase of inputs made during the year, the same should be added to the cost of inputs. Appropriate adjustment in that case would have to be made while valuing inventory of inputs. If the amount adjusted pertains to disallowance/withdrawal of credit in respect of purchases effected in earlier years, the accounting treatment would depend on whether the said inputs/supplies are available in stock or not. If they are not available, i.e., these have already been sold, the disallowance/withdrawal should be debited to profit and loss account and treated as expense of the current year. If these are still lying in stock, the amount should be added to the cost of inputs

30. If the amount utilised out of VAT credit receivable balance pertains to any disallowance/withdrawal of VAT credit on capital goods, the same should be added to the cost of the relevant fixed asset. For accounting purposes, depreciation on the revised unamortised depreciable amount should be provided prospectively over the residual useful life of the asset. In case the fixed asset no longer exists, the relevant amount should be written off in the profit and loss account with an appropriate disclosure. If the amount of VAT credit disallowed on capital goods is standing to the debit of VAT Credit Deferred (Capital Goods) Account and has not been transferred to VAT Credit Receivable (Capital Goods) Account, the account to be credited would be the VAT Credit Deferred (Capital Goods) Account.”

View 2

The amount of ITC reversed/ written off should be charged to the Statement of Profit and Loss immediately. To support this view, it may be argued that cost of acquiring inventory and/ or items of property, plant and equipment is determined at the time of procurement and related ITC. The GST amendment has resulted in write-off of ITC and it should not result in a change in cost acquisition of the underlying asset.

In the absence of specific guidance, we believe both the views can be supported and the view selected should be applied consistently. If an entity elects to apply view 1 and capitalizes ITC reversed/ written-off, adding it to the cost of inventory/ property, plant and equipment, then it will need to test inventory for lower of cost and Net Realizable Value (NRV) as per requirements of Ind AS 2 and items of property, plant and equipment (or cash generating unit to which item belongs) for impairment in accordance with Ind AS 36 Impairment of Assets.

If the amount is capitalized to the cost of property, plant and equipment, should depreciation be charged prospectively or retrospectively?

In this scenario, we believe that reversal of ITC represents a change in estimate under Ind AS which results in a prospective change in the carrying amount of the related asset. Accordingly, depreciation on the newly capitalized amount should be charged prospectively from the date of capitalization. This view is also supported by the EAC opinion on Accounting treatment of additional capitalisation arisen due to arbitration award. The earlier Guidance Note on Accounting for State-level Value Added Tax, as stated above, also supports a similar view.

Concluding remarks

In practice, more complex situations may arise, for example where common inputs are used both for production of taxable and exempt goods or there are complexities in interpreting requirements of the law. It is imperative that all entities engage with their indirect tax professionals and have proper assessment of how the amendments impact their GST balances. If there is any impact, it needs to be ensured that such impacts are appropriately accounted for. Since these changes are applicable immediately, the accounting impact also arises immediately, i.e., financial results for the quarter ended September 2025 in case of listed entities. To enable transparency, entities should also consider making appropriate disclosures including accounting treatment followed in their September quarter results and/ or annual financial statements if the impacts are material