Finance Ministry Issues Detailed FAQs on GST 2.0 Tax Rate Cuts

New Delhi, Sept 2025 : The Finance Ministry on Tuesday released an exhaustive set of Frequently Asked Questions (FAQs) to clarify the recent changes in tax rates announced under the ambitious GST 2.0 reforms. These reforms, which were finalized at the 56th meeting of the GST Council, are designed to rationalize tax structures, reduce industry confusion, and improve compliance across sectors ranging from pharmaceuticals to hospitality, transport, insurance, and real estate.

The 19-point FAQ document seeks to address concerns of manufacturers, traders, insurers, hoteliers, transporters, and consumers, offering clarity on both the rates applicable and the treatment of Input Tax Credit (ITC).

Pharmaceuticals and Medical Devices: No Recall Needed, Only Compliance at Retail Level

One of the most pressing questions came from the pharmaceutical sector, where concerns had been raised about whether medicines and medical devices already in the supply chain would need to be recalled or relabeled to reflect the new tax rates.

The Ministry clarified that manufacturers and marketing companies are required to revise the Maximum Retail Price (MRP) of all drugs and formulations, including medical devices, in line with the revised GST rates. They must also issue revised or supplementary price lists in Form V/VI to dealers, retailers, and state drug controllers.

However, the government made it clear that recalling, relabeling, or re-sticking existing stocks in the market before September 22, 2025, is not mandatory, provided manufacturers can ensure compliance at the retail level. This measure is expected to ease transition burdens on companies while safeguarding consumer interests.

Uniform Tax Rate on Drones

Another significant clarification relates to unmanned aerial vehicles (UAVs) or drones. Previously, drones attracted different tax rates—5%, 18%, and 28%—depending on their specifications.

With GST 2.0, the government has standardized the tax at 5% for all drones, signaling an intent to promote the drone industry, which is poised to play a critical role in agriculture, logistics, and surveillance.

Bricks and Construction Material

The FAQs also clarified the treatment of bricks. The GST Council reduced the tax rate on sand lime bricks from 12% to 5%, aligning with industry requests.

All other kinds of bricks continue under the special composition scheme—taxable at 6% without ITC and 12% with ITC—subject to a threshold turnover of ₹20 lakh.

For job-work services related to sand lime bricks, the GST will be 5% with ITC, further easing compliance for small manufacturers.

Insurance Sector: Exemptions for Individuals, Limited ITC

One of the consumer-friendly changes involves health and life insurance. The Finance Ministry confirmed that services related to individual health and life insurance policies will be exempted from GST, provided they are not part of a group plan.

However, the exemption has implications for insurers. While reinsurance services will also be exempted, other input services such as commissions and brokerage will not qualify for ITC. This means insurers will need to reverse credits in proportion to their exempt supplies, as per Section 17(2) of the CGST Act.

Hospitality: Clear Rules for Accommodation and Wellness Services

The FAQs specify that hotel rooms priced ₹7,500 or below per unit per day will attract 5% GST without ITC. Hoteliers do not have the option to charge 18% with ITC on such rooms, making the concessional rate mandatory.

Similarly, beauty and wellness services are also fixed at 5% without ITC, eliminating the option of opting for higher tax with credit.

Industry experts believe these measures are aimed at making hospitality and wellness more affordable to consumers, while simplifying compliance.

Transport Sector: From Bus Body Building to Multimodal Goods

Bus Body Building

Job-work services relating to bus body building will now be taxed at 18% with ITC. The government explained that this is part of a larger rationalization to bring all residual manufacturing and job-work services under a single 18% bracket.

Multimodal Transport of Goods

Transporters sought clarity on multimodal logistics involving two or more modes of transport. The Ministry clarified:

• If no leg involves air transport, the rate is 5% with restricted ITC (limited to 5% of the transportation value).
• If any leg involves air transport, the rate is 18% with full ITC.

This is expected to encourage transparency in India’s logistics sector, a key driver of the country’s manufacturing competitiveness.

Local Delivery and E-Commerce

The government has also brought clarity to local delivery services provided through e-commerce operators (ECOs).

• Such services will be taxable at 18%.
• Under Section 9(5) of the CGST Act, the ECO will bear the liability to pay GST, not the individual delivery personnel, if they are unregistered.
• Importantly, ECO-provided local delivery services will not fall under the definition of a Goods Transport Agency (GTA).

This shift recognizes the rise of gig economy platforms in urban logistics while protecting small service providers from compliance burdens.

Leasing and Renting

Leasing or renting services without an operator will continue to be taxed at the same rate as the supply of the underlying goods. For example:

• Cars or machinery taxed at 18% will also attract 18% when leased without an operator.
• Motor vehicles taxed at 5% or 40% will attract the same rate if leased.

For leasing/renting with an operator (such as a driver), suppliers will have two options:

1. 5% with ITC of input services within the same line of business
2. 18% with full ITC

This dual structure is designed to give flexibility to service providers.

ITC Treatment in 5% Without Credit Regime

The Finance Ministry emphasized that in cases where GST is payable at 5% without ITC, strict rules on input tax apply:

• Input tax credit on goods or services used exclusively for such supplies cannot be claimed.
• If inputs are used for both exempt and taxable supplies, proportionate ITC reversal will be required.

This ensures revenue neutrality while maintaining the concessional rates for certain consumer-facing services.

Why the FAQs Matter

The FAQs reflect the government’s effort to proactively address industry concerns and minimize disputes. The GST 2.0 reforms, while welcomed for rate rationalization, have also raised compliance questions, particularly for industries with multiple tax slabs like hospitality, transport, and healthcare.

Tax experts note that the new regime seeks to strike a balance between consumer relief and fiscal prudence. The uniform 5% tax on drones, lower rates on sand lime bricks, and exemptions for individual insurance demonstrate consumer sensitivity, while the strict ITC reversal rules and rationalization of job-work services reflect the government’s intent to safeguard revenue.

Industry Reaction

Initial reactions from industry bodies have been mixed.

• Pharmaceutical companies welcomed the decision to avoid stock recalls, which would have created logistical nightmares.
• Insurers, however, expressed concerns about loss of ITC on brokerage and commissions, which may impact operating margins.
• Hoteliers and wellness service providers said the mandatory 5% without ITC rate would simplify billing but limit credit utilization.
• Logistics players appreciated the clarity on multimodal transport, though smaller operators remain concerned about restricted ITC.

Looking Ahead

With GST 2.0 reforms taking effect from September 22, 2025, the Finance Ministry’s FAQs are expected to serve as a crucial compliance tool for businesses. The government is likely to issue more clarifications as industries adapt to the changes.

Tax analysts stress that transparency and consistency in interpretation will be key to ensuring that GST 2.0 delivers its intended benefits: a simpler, fairer, and more predictable tax regime.