GST Rate Reduction from 18% to 5% – Is Input Tax Credit (ITC) Reversal Required Under Section 18(4)?

Note: This article is based on the recommendations of the 56th Meeting of the GST Council. The legal understanding presented here is derived from those recommendations and the applicable provisions of the CGST Act and Rules as of 8th September 2025.

The Goods and Services Tax (GST) framework in India allows seamless flow of Input Tax Credit (ITC) to ensure tax neutrality and avoid cascading effects. However, certain circumstances require taxpayers to reverse ITC previously claimed. One such provision is Section 18(4) of the CGST Act, 2017.

With effect from 22nd September 2025, the GST Council has recommended a reduction in the GST rate on certain goods from 18% to 5%. This development has raised a pertinent question among taxpayers and professionals alike:

Does the reduction in GST rate from 18% to 5% require reversal of ITC under Section 18(4) of the CGST Act?

Let us examine this from a legal and practical perspective.

Understanding Section 18(4) – When is ITC Reversal Required?

Section 18(4) of the Central Goods and Services Tax Act, 2017 states:

“Where any registered person who has availed of input tax credit opts to pay tax under Section 10 [composition scheme] or, where the goods or services or both supplied by him become wholly exempt, he shall pay an amount, by way of debit in the electronic credit ledger or electronic cash ledger, equivalent to the credit of input tax...”

In simple terms, ITC must be reversed in the following two situations:

When a registered person opts for the Composition Scheme under Section 10,

When the supplies become wholly exempt from GST.

Further, Rule 44 of the CGST Rules, 2017 prescribes the method for calculation of ITC to be reversed in such cases, especially for inputs, semi-finished goods, finished goods, and capital goods (reduced by 5% per quarter of usage).

Does Reduction of GST Rate Qualify as 'Wholly Exempt'?

The critical phrase in Section 18(4) is: “goods or services or both supplied by him become wholly exempt.”

Let’s interpret this:

Wholly Exempt means the outward supply is entirely exempt from GST.

This typically applies when:

The GST rate becomes 0% (zero-rated),

The supply is not liable to tax under GST,

The supply is moved to the exemption list via a notification.

However, when the GST rate is reduced — for instance, from 18% to 5% — the supply is still taxable, just at a lower rate.

Therefore, the supply does not become wholly exempt, and hence, Section 18(4) does not apply.

Example for Clarity

Rahul, a registered dealer, sells electronic items that were earlier taxable at 18% GST. With effect from 22.09.2025, the government reduces the GST rate on those items to 5%.

Rahul has availed ITC on purchases made before the rate change.

Now the question is: Should Rahul reverse any of the ITC?

Answer: NO.

The goods are still taxable, albeit at a lower rate (5%).

The right to claim ITC is not linked to the rate of output tax, but to whether the supply is taxable.

Since Rahul is still making taxable supplies, he is eligible to continue availing and utilizing ITC.

There is no requirement to reverse ITC under Section 18(4) or Rule 44 in this scenario.

Supporting Views from Practice and CBIC Clarifications

The Central Board of Indirect Taxes and Customs (CBIC) has, in various clarifications, consistently taken the position that:

Mere reduction in GST rate does not trigger reversal of ITC, since the goods remain taxable.

There are also Advance Rulings (AARs) and professional commentaries that confirm the view that Section 18(4) applies only when the supply becomes wholly exempt, not when it remains taxable at a reduced rate.

Conclusion

A reduction in the GST rate (e.g., from 18% to 5%) does not amount to an exemption, and hence does not attract ITC reversal under Section 18(4) of the CGST Act, 2017.

Unless a taxpayer:

Opts for the Composition Scheme, or

The supplies become wholly exempt (i.e., taxed at 0% or moved to exemption list),

there is no obligation to reverse input tax credit under this provision.

Key Takeaways:

Section 18(4) applies only when the supply is no longer taxable at all.

Reduction of GST rate from 18% to 5% does not trigger ITC reversal.

Taxpayers may continue to claim and utilize ITC as per normal provisions.

This article is based on the interpretation of the CGST Act and Rules as applicable as on 08.09.2025, and the recommendations of the 56th GST Council Meeting. While reasonable care has been taken to provide accurate information, tax laws are subject to change and interpretation.

Readers are advised to consult a qualified tax professional or GST practitioner for advice specific to their business circumstances.