GST 2.0 — Implications for Customs, IGST & Compensation Cess

Executive summary

The 56th GST Council (3 Sept 2025) approved a set of rate rationalisations and structural changes that together form what market commentators call GST 2.0. Most relevant for imports/customs and compensation cess:

• The Council recommended rationalisation and significant reduction to the compensation cess on several items, with many cess rates set to Nil effective 22 September 2025 (but retained on specified sin products). Implementation was carried out via notifications issued by the Department of Revenue / CBIC.
• CBIC/Customs issued aligned Customs notifications (e.g., Notification No. 38/2025-Customs dated 17 Sept 2025) to give effect at the import/IGST level — including exemptions/clarifications on charging IGST and compensation cess under Customs Tariff Act provisions, effective 22 Sept 2025 unless otherwise stated.

Net effect for many businesses: lower transaction tax burden on affected imported goods (where cess was removed), but significant transitional and cash-flow / compliance issues remain — especially around blocked/accumulated compensation-cess, ITC implications, valuation and customs classification consequences.

Notifications / legal instruments

• Recommendations of 56th GST Council (3 Sept 2025) — official press release & FAQs (source of policy decisions).
• Notification No. 02/2025 — Compensation Cess (Rate) (dated 17 Sept 2025) — prescribes Nil cess on a list of goods and retains cess on certain tobacco/sin goods; effective 22 Sept 2025. (See official Gazette/CBIC notification PDF).
• Notification No. 38/2025 — Customs (dated 17 Sept 2025) — amends Customs notifications to reflect IGST/cess position and certain exemptions under section 3(7) of the Customs Tariff Act; effective 22 Sept 2025 (as per notification).
• Central/Integrated Tax Rate Notifications (17–18 Sept 2025) — multiple notifications (e.g., Central Tax/IGST rate amendments referenced by professional services firms) giving effect to GST rate changes effective 22 Sept 2025.

Tip: Always consult the Gazette PDFs for exact wording and effective dates — the press release/Faqs set policy; notification PDFs carry the legal force.

How these changes affect Customs duty / IGST and the import chain

1. Compensation cess removed on many imported items: For goods where the compensation cess rate was set to Nil, importers will no longer be charged that cess at the time of import (subject to Customs notification). This lowers the landed cost immediately and affects valuation basis for IGST/cess computation where cess earlier formed part of assessable value.
2. IGST alignment / rate changes: GST rate rationalisations for certain goods/services were mirrored by Central/Integrated Tax notifications — importers must check the specific IGST rate notifications because IGST at customs follows the Integrated Tax rate schedule. Where GST slab changed, IGST at import will change accordingly from the notified effective date.
3. Transitional issues on stock & inventory: Imports already cleared (or landed but not sold) before the effective date may still have compensation cess paid — question of whether that cess can be transferred to other ledgers, claimed as refund, or becomes irrevocably blocked is a major practical issue. Several industry bodies have flagged liquidity concerns (e.g., automobile dealers holding blocked cess balances). Expect clarifications or circulars from CBIC/DoR on ledger transfer/refund mechanics; monitor for circulars.
4. Customs classification / tariff implications: Some goods whose cess was removed remain in the same tariff lines; customs handlers must ensure classification is consistent with Central tax notifications. Any mismatch invites scrutiny at assessment and post-clearance checks.

Sectoral impact — practical view

Pharmaceuticals

• Direct impact on customs: Most finished pharmaceuticals were not heavily subject to compensation cess even before these changes, so customs duty/IGST effect is limited. However, inputs/chemicals and certain intermediates may have benefitted if previously bearing cess — lowering input landed costs.
• Regulatory risk: Pharma importers should re-check tariff lines, ensure correct IGST rate now applied, and update procurement costing. Expect minimal pricing benefit in end-products unless the cess previously applied to key imported intermediates.

Automobiles (passenger vehicles, dealers)

• Major impact: Compensation cess on many motor vehicle categories was reduced to Nil for specified vehicles, but the Council retained cess on certain high tax sin goods (and special categories). Importers of passenger cars (including CKD/CBU) and dealers must note:
  • Immediate reduction in landed cost where cess removed.
  • Key pain: dealers/manufacturers who had accumulated compensation-cess ledgers are concerned about whether those balances can be used or refunded — this raises cash-flow and working-capital issues during festive season. Industry representations are expected.

Coal, Lignite, Peat and related

• Coal & minerals: Compensation cess on coal, lignite and peat is among items where the cess was reduced to Nil — direct import cost relief for power/industrial users. However, royalty, coal cess at source and other levies remain. Importers should adjust landed cost models.

FMCG / Beverages

• Aerated drinks and certain caffeinated beverages had cess rationalised — impact on importers/bottlers depending on whether inputs or finished products are imported. Inventory accounting and shelf pricing need updates.

Other sectors (textiles, handicrafts, petroleum operations)

• Textile/garment thresholds and fibre-neutral changes in GST rates were part of the broader package — importers of fabrics/yarn must review new GST slabs which also dictate IGST at import. Petroleum operations saw targeted rate revisions referenced in the Central/IGST notifications — check the specific notification numbers when handling imports for petroleum activities.

Practical actions for importers, customs brokers and tax teams (recommended checklist)

1. Pull the exact notifications (Gazette PDFs): Refer to Notification No. 02/2025 (Compensation Cess),Notification No. 38/2025 (Customs) and Central/IGST rate notifications issued 17–18 Sept 2025. Confirm effective dates (mostly 22 Sept 2025).
2. Update ERP & customs valuation rules to remove cess lines where Nil; update IGST rates for affected tariff lines.
3. Reconcile compensation-cess ledger balances (blocked/accumulated amounts) for all entities — maintain detailed supporting records (date of import, challan, ledger entries). Prepare to file representations/requests for transfer/refund if CBIC/DoR allows.
4. Coordinate with customs broker to ensure correct bill of entry treatment and avoid under/overpayment.
5. Inventory review: For goods imported before effective date but sold after, establish policy (tax/finance) for whether historical cess paid stays charged to P&L or whether refund/adjustment will be sought.
6. Watch for CBIC circulars clarifying transition mechanics — these typically follow notifications and FAQs.

Detailed FAQ (based on FAQs released alongside 56th Council recommendations and notifications)

Q1 — When did the changes become effective?
A1 — The GST Council recommendations were dated 3 Sept 2025. CBIC notifications implementing the changes were issued mid-September; most rate/cess changes came into effect on 22 September 2025 — always confirm by checking the specific notification’s “w.e.f.” clause.

Q2 — Is compensation cess abolished altogether?
A2 — No. The Council rationalised and set cess to Nil on many items but retained cess on selected sin/tobacco products and some other categories. The legal framework (Compensation to States Act) remains; notifications change the rates for specific items.

Q3 — If I paid compensation cess on an import before 22 Sept 2025, can I get a refund?
A3 — Not automatically. The notifications change rates prospectively. For earlier payments, remedies depend on administrative circulars, refund/adjustment provisions under Customs, and specific transitional rules. Tax authorities may issue clarifications about ledger transfers/refunds — follow CBIC/DoR circulars and, if needed, pursue refund claims with supporting documents. Industry has flagged liquidity concerns; expect requests for facilitative transition guidance.

Q4 — How does this affect IGST at Customs?
A4 — IGST at import follows integrated tax rates. Where the GST slab was changed by the Council and notified, IGST at Customs will be aligned to the new notified IGST rate from the effective date. Confirm applicable rate notifications for the exact tariff heading.

Q5 — Will customs valuation change because cess was removed?
A5 — If compensation cess previously formed part of assessable value under specific provisions, removing the cess can change the total tax composition at import and therefore affect certain computations. Practically, the landed cost falls for items where cess is Nil. Ensure customs declarations reflect the current law.

Q6 — What should dealers/manufacturers do now?
A6 — Reconcile cess-ledger balances, update pricing & costing models, consult tax advisors on refund/adjustment prospects, and prepare representations to authorities if there is material blocked cess exposure. Maintain auditable records of all imports, ledger entries and communications.

Risks, open issues and monitoring points

• Transition mechanics for ledger balances (refund vs. transfer vs. write-off) — high commercial risk for sectors with large accumulated cess (auto dealers, distributors). Monitor for a CBIC circular on ledger transfers/refunds.
• Disputes on classification & valuation — expect more scrutiny/assessments as taxpayers reclassify items to benefit from Nil cess. Maintain contemporaneous technical classification notes.
• State revenue & constitutional considerations — any permanent replacement of compensation cess (e.g., proposals for specific health/clean energy cess) would require political and constitutional treatment; for now the Council limited itself to rate rationalisation.

Conclusion 

The 56th GST Council has pushed through a substantive rate & cess rationalisation package implemented by CBIC notifications in mid-September 2025 — producing immediate reductions in landed costs for a range of imported goods (coal, certain vehicles, beverages, etc.) and aligning IGST with new GST slabs. That is good for demand and input costs.

However, the immediate policy win is tempered by transition pain — accumulated compensation-cess ledger balances, ITC/ledger accounting complications, and classification disputes create real cash-flow and compliance risks for importers and domestic distributors. Tax teams should act now: reconcile, update systems, and prepare representations where blocked cess is significant. Regulators historically issue implementation circulars — stay ready to act when those clarifications land.