Taxation experts have cautioned that the carve-outs offered in rates, along with classification anomalies and unresolved input tax credit (ITC) structures may lead to challenges for businesses, even after the new and simplified Goods and Services Tax (GST) 2.0 regime takes effect.
While the GST Council has rationalised several entries to align them with a two-slab framework, experts have pointed at persistence of anomalies like dual rate on bricks, inconsistent classification of products like sanitisers (medicament vs disinfectant) and antiseptic creams or therapeutic shampoos (medicament vs cosmetic).
While industry and tax experts have called the shift to a two-rate system as a big step towards simplification of GST, businesses are wary of interpretational disputes, especially in categories where classifications overlap.
Duality Within the 5 Percent Slab
At the heart of the concern is the persistence of dual treatment within the 5 percent slab. Restaurants and affordable housing are compulsorily taxed at 5 percent without ITC, while tour operators, passenger transport, renting of motor vehicles with operator and fuel and specified job work services enjoy the same rate with ITC.
“A key anomaly that continues in GST 2.0 is the presence of dual structures within the 5 percent slab where certain sectors are taxed at 5 percent with ITC, while others face the same rate without ITC. For instance, tour operator services, specified job work services, passenger transport, and renting of motor vehicles (with operator and fuel) are taxed at 5 percent with ITC, whereas restaurants and affordable housing attract 5 percent without ITC. This fragmented framework creates unnecessary complexity for both taxpayers and administrators. Businesses often struggle to evaluate ITC eligibility, and even minor procedural lapses may lead to disputes during audits,” an tax expert told Moneycontrol.
Special Rates for Bricks
While GST 2.0 aims to streamline tax rates, bricks continue to attract dual levy under a special composition scheme. Ordinary bricks are taxed at 6 percent without ITC or 12 percent with ITC, a structure that has remained unchanged since its introduction in 2022. The 56th GST Council meeting on September 3, 2025, retained this framework, with only sand lime bricks seeing rates lowered to 5 percent. This dual system is at odds with the move towards a simpler two-rate GST, experts have said.
Sanitiser and Other Classification Issues
Beyond rate structures, classification disputes continue to cloud the tax landscape. The case of sanitisers is one example. With medicaments brought under the 5 percent bracket, disinfectants continue to attract 18 percent GST. This has created ambiguity, as sanitisers are treated by some companies as medicinal preparations while tax officers have insisted on classifying them as disinfectants.
“While the move towards GST 2.0 and a two-slab structure is a welcome step, several anomalies continue to persist and may trigger disputes. A glaring example is the classification of sanitisers. With medicaments now brought under the 5 percent bracket, the continued levy of 18 percent on disinfectants has created uncertainty, as many companies have historically treated sanitisers as medicinal preparations. The widening tax gap between 5 percent and 18 percent exposes businesses to litigation risk if they adopt the concessional rate. Such overlapping raises interpretational issues for taxpayers,” another tax expert told Moneycontrol.
The GST Council must shift towards ironing out these inconsistencies so that GST 2.0 truly delivers the promise of a simple, predictable and dispute-free tax regime, he added.
Another persistent grey area is the distinction between medicaments and cosmetics. Products such as antiseptic creams, therapeutic shampoos, and pain relief balms may be taxed as medicaments at 5 percent, while similar items are often treated as cosmetics at 18 percent. This lack of uniformity exposes companies to compliance risk and litigation.
Similarly, nutraceuticals and health supplements face divergent treatment, with some classified as food preparations at 5 percent while others pushed into the 18 percent slab. The overlap between food safety regulations and GST rate entries can make compliance a challenge.
“The overlap between food safety regulations and GST tariff entries makes compliance extremely complex for companies,” he added.
The GST Council may need to undertake another round of rationalisation to address these anomalies and bring predictability into the tax regime, according to experts.
Based on feedback from tax experts, here is a simplified and short FAQ on the anomalies in the classification of items:
Q1. Why do some sectors pay 5 percent without ITC while others get ITC at the same rate?
The Council has prescribed a mandatory concessional rate for sectors like restaurants and affordable housing at 5 percent without ITC. In contrast, tour operators, passenger transport and some job work services are allowed 5 percent with ITC, creating a dual structure.
Q2. What is the GST treatment on bricks?
Ordinary bricks attract 6 percent without ITC or 12 percent with ITC under a special composition scheme. Only sand lime bricks saw a rate reduction to 5 percent in September 2025.
Q3. Why are sanitisers disputed under GST?
Sanitisers straddle two categories: medicaments taxed at 5 percent and disinfectants taxed at 18 percent. This lack of clarity fuels litigation.
Q4. How are nutraceuticals and health supplements taxed?
Some are classified as food preparations at 5 percent, while others fall under higher 18 percent categories. The overlap with food safety rules complicates compliance further.
