GST 2.0 and Your ITC: How the New Slabs Are Quietly Changing Your Cash Flow

You updated your product rates after September 22. Good. But there's a second-order effect that's hitting sellers' working capital right now, and almost no one is tracking it. GST 2.0 didn't just change what you charge customers — it changed how much input tax credit you accumulate, and whether it's usable or stuck.

For sellers doing ₹5L+ monthly GMV, the ITC mismatch can run into five figures a month. Here's the mechanism and what to do about it.

How ITC Works — The Part Textbooks Skip

Every time you pay GST on a business purchase — packaging, courier, Amazon selling fees, graphic design, your CA's invoice — you earn a credit. That credit offsets the GST you collect from buyers when you sell. You pay the government only the net difference.

The problem has always been rates. If you buy at 18% but sell at 12%, you accumulate more ITC than you can use. The difference doesn't disappear — it sits in your electronic credit ledger on the GST portal, technically yours, but not in your bank account. You have to apply for a refund to get it out. And refund processing takes 60–90 days.

GST 2.0 moved thousands of products either up or down from the old 12% bracket. Both directions create an ITC event. Most sellers are only thinking about one.

If Your Product Moved Down to 5%

Your output liability just dropped, which sounds great. But your input costs — Shiprocket at 18%, Amazon fees at 18%, packaging material at 18%, warehouse rent at 18% — haven't changed at all.

Every month you sell, you collect 5% from buyers. Every month you operate, you spend 18% on inputs. The credit accumulates faster than it can be used. Left unchecked, you could be sitting on ₹20,000–₹40,000 in blocked ITC by the end of Q4 FY 2025-26.

Deepika runs a ₹9L/month incense and wellness products brand across Amazon and her own Shopify store. Her products — agarbattis and decorative candles — dropped from 12% to 5% in September. By November, her CA showed her ₹31,000 in accumulated ITC with nowhere to go. She filed a refund claim in December. The money came back in late January. Two months of working capital, frozen, for no operational reason other than a late refund application.

What to do: File for an ITC refund under Rule 89 of CGST Rules. You can claim a refund on the "inverted duty structure" — this is the technical term for exactly your situation. File monthly if the accumulation is significant; don't wait for year-end.

If Your Product Moved Up to 18%

Your output liability increased — but so did your ability to absorb ITC. This is the counterintuitive side of GST 2.0.

If you've been carrying an ITC balance from when your output rate was 12%, that balance is now easier to use. You're collecting more output tax per sale, which means more room to offset credits. For many sellers, the net GST cash outflow in October–December 2025 actually fell despite the headline rate increase.

Run the numbers. Don't assume a higher rate means a higher payment.

The September 22 Split: Your Most Likely Compliance Risk

GST 2.0 took effect mid-month. That means September 2025 invoices have two sets of rates depending on the date.

If you raised even one invoice on the wrong rate in the transition window — charging 12% on a product that was now 18% from the 22nd — you have a mismatch between your GSTR-1 and your buyer's GSTR-2B. Buyers reconcile these when they file. A mismatch means your buyer's ITC claim gets blocked, they flag it to their CA, and eventually the query comes back to you.

This isn't theoretical. GST portal mismatches generate automated notices. Fix them now with an amendment in your next GSTR-1 filing, not after a notice arrives.

Your Three-Step ITC Audit for Q3 FY 2025-26

1. Download GSTR-2B for October, November, December 2025. Cross-check every vendor invoice against your purchase register. Confirm the rate on each line item reflects the post-September 22 schedule.

2. Check your electronic credit ledger on the GST portal. If it's growing month-on-month without a corresponding reduction in your cash ledger payments, you're accumulating ITC faster than you're using it. That's your refund amount.

3. Classify your ITC surplus correctly. If it's from an inverted duty structure (input rate > output rate), apply under Rule 89. If it's from zero-rated exports (selling internationally), apply under LUT with a different form. Your CA should be able to do this in under an hour if your books are in order.

Not sure how your current filing position looks? Walk through your numbers on the GST return filing page or check your full filing obligations on the GST guide for e-commerce sellers.

If you're not yet registered — or if your registration doesn't reflect your updated product categories post-GST 2.0 — fix that first at the GST registration page.

GST 2.0 simplified the headline rate structure. But the ITC mechanics underneath got more important, not less. Sellers who track their credit ledger monthly will have tighter cash flow than those who treat ITC as a once-a-year reconciliation task at filing season.