Home ／ Insights on entering the Indian market
2026.03.26
India's Goods and Services Tax (GST), since its introduction in July 2017, has been a historic indirect tax reform that unified a massive market of over 1.4 billion people under a single tax system. For the food industry, it is the single most important tax regime, directly affecting the entire supply chain (raw material sourcing, manufacturing and processing, logistics, wholesale, and retail), and for Japanese food companies to succeed in the Indian market, accurately grasping its structure and latest developments is essential.
On September 22, 2025, a major reform known as "GST 2.0" took effect following a decision of the 56th GST Council. The previous five-tier slab structure of 0%, 5%, 12%, 18%, and 28% was effectively reorganized into four tiers, 0%, 5%, 18%, and 40%, bringing substantial rate cuts in the food sector. This article provides a thorough explanation covering the full scope of GST 2.0, tax rates by food category, taxation of imported food, mandatory e-invoicing, and the practical challenges Japanese companies face.
Before GST was introduced, India had more than 20 separate indirect taxes levied individually by the central and state governments, including Central Excise, Service Tax, Value Added Tax (VAT), Octroi (entry tax), and entertainment tax. Customs-like procedures arose every time goods crossed state lines, and for food companies, the risk of quality deterioration in chilled and frozen goods and the rise in logistics costs were serious challenges.
GST consolidated these into a single "multi-stage value-added tax" system that taxes value addition at each stage from manufacturing through to final sale to the consumer. Tax revenue is split evenly between Central GST (CGST) and State GST (SGST), while Integrated GST (IGST) applies to inter-state transactions. This system applies a uniform tax rate across all of India and eliminates double taxation. For food companies, the biggest benefit is that all 28 states and 8 union territories can now be treated as a single market for doing business.
Factors Behind Failed Entries into India When we analyze such cases, insufficient understanding of the GST system not infrequently leads to cost overruns and tax risk. Understanding the system in advance is the first step to success.
GST 2.0 is the largest structural reform carried out in the eight years since the system was introduced. Behind it were frequent classification disputes caused by complex tax-rate categorization, public frustration over the excessive tax burden on daily necessities, and a policy intent to curb inflation.
First, simplification of the tax rate slabs. The previous five-tier slab structure was effectively consolidated into three tiers, a "merit rate" of 5%, a "standard rate" of 18%, and a "demerit rate" of 40%, plus a tax-exempt 0% tier. The 12% slab was abolished, with affected items redistributed into either the 5% or 18% tier.
Second, the expanded tax exemption for daily necessities. Items that moved from 5% to 0% include UHT milk, packaged and labeled chhena/paneer, pizza bread, and kachori/chapati/roti, while Indian breads such as paratha moved from 18% to 0%. The scope is limited, but exempting everyday staples and dairy products from tax carries significant meaning.
Third, A sharp tax increase on carbonated soft drinks and energy drinks. The previous 28% rate plus compensation cess (totaling around 40%) has been consolidated into a single 40% rate. This clarifies its positioning as a "sin tax" aligned with health policy.
The list of tax-exempt items has expanded substantially. Beyond unpackaged grains (wheat, rice, corn, and millets), which were already exempt, the packaged foods that moved to 0% under the reform are limited to specific items such as packaged and labeled chhena/paneer. Specifically, UHT milk (previously 5% to 0%), packaged and labeled paneer (previously 5% to 0%), and Indian-style breads became tax-exempt. Bread items had varying rates before the reform: chapati, roti, kachori, and pizza bread moved from 5%, while paratha and parotta moved from 18%, both to 0%.
There are conditions for grains and pulses, however. Wheat flour, dal (pulses), millet flour, and similar items are tax-exempt only when they are not packaged and labeled, and packaged, branded products still carry a 5% rate. Unpackaged items were already tax-exempt before GST 2.0, so this is not a change brought about by the reform.
Butter, cheese, ghee (clarified butter), cream, condensed milk, yogurt (packaged), and dairy spreads are classified at 5%. Bakery products such as cakes, biscuits, crackers, and cookies, as well as chips, popcorn, namkeen (Indian-style savory snacks), and puffed rice are also at 5%. Note that bread items are at 0% as described above, so do not include them under the 5% category. Since items that were previously at 12% have been lowered to 5%, processed food manufacturers now have room to lower consumer prices.
Looking at Schedule II, the 18% tier in the GST 2.0 rate schedule (Notification No. 9/2025, effective September 22, 2025), among the chapters covering food (HSN 01-21), about the only item individually named is artificial honey (HSN 1702). Chocolate (HSN 1806), pasta and instant noodles (HSN 1902), bakery products (HSN 1905), and cheese (HSN 0406), which used to be at 12% or 18%, have all moved to Schedule I at 5%.
That said, the same schedule includes a catch-all clause stating that "any goods not specified in any Schedule shall be taxed at 18%." Items not individually listed do not automatically fall into a lower rate, so be sure to check where your own product's HSN is classified.
The assumption that "a high-value-added processed food must carry a high tax rate" no longer holds under GST 2.0. If anything, the premium-tier products that Japanese companies tend to handle have seen their rates fall, so the assumptions behind price design need to be rethought.
One point requiring caution is frozen pizza. Pizza bread, the dough component, became 0% under GST 2.0, but which HSN to declare for a finished frozen pizza that already includes toppings has been decided inconsistently in past rulings, based on whether further cooking is required. Check which category your own product falls under, at the HSN level, before importing or manufacturing.
Carbonated soft drinks (cola, soda, flavored sparkling water), caffeinated beverages, and sweetened non-alcoholic beverages are classified at 40%. For carbonated soft drinks and caffeinated beverages, the burden is unchanged, since the pre-reform rate was already effectively 40% (28% plus compensation cess), and the calculation has simply become more transparent by folding the cess into the main tax. On the other hand, other non-alcoholic beverages not specified in Schedule I also fall into this 40% category, which represents a real increase for some items. Companies considering a beverage business need to build a profit model that assumes this high tax rate.
GST for the foodservice industry varies significantly by business format. Dining at a general restaurant (including takeout) is taxed at 5% (without input tax credit). Because input tax credit (ITC) is not permitted, the tax paid on inputs such as raw materials and equipment cannot be deducted from output tax.
On the other hand, restaurant services provided within facilities that qualify as "specified premises" are taxed at 18% (with input tax credit). Because ITC is available, there is the advantage of being able to recover the cost of capital investment and sourcing high-quality raw materials through tax credits.
The criteria for this determination changed on April 1, 2025. The previous categories of "five-star hotel" and "declared tariff" were abolished, and now a facility that actually charged more than 7,500 rupees per night at any point in the previous fiscal year, or a facility that has filed the prescribed declaration, is treated as a specified premises. Independent restaurants not attached to a hotel are not eligible to file this declaration and remain at 5% (without ITC). Outdoor catering is likewise not uniformly taxed at 18%; it splits between 5% and 18% depending on whether it is provided within a specified premises.
This rate difference has a direct bearing on business model design. For a premium positioning, using ITC can reduce the effective tax burden, while for a mass-market rollout, the lower 5% rate becomes a source of price competitiveness. Local partners When considering a collaboration format with such an operator, it is also important to understand this tax structure.
When exporting food from Japan to India, it is necessary to understand the dual structure of customs duty and GST. First, Basic Customs Duty (BCD) is levied, and IGST (Integrated GST) is added on top of it. Because the IGST rate matches the GST rate applied to domestic sales, importing a product in the 18% category means it is taxed at the Basic Customs Duty (which varies widely by item, from 5% to 150%) plus 18% IGST.
In addition, an Agriculture Infrastructure and Development Cess (AIDC) is added to certain items. Because AIDC applies only to individually specified items, you need to check before importing whether your own product is subject to it. One point to be careful of here is the order of calculation. IGST is levied on the amount obtained by adding Basic Customs Duty to the product's price, so simply adding the Basic Customs Duty rate and the IGST rate together will underestimate the effective tax rate. In addition, a Social Welfare Surcharge (SWS) equal to 10% of the Basic Customs Duty amount is also added. IGST itself is 5% for most processed foods since GST 2.0, but the effective burden depends heavily on the Basic Customs Duty rate for each item, so calculate it by building up the figures at the HSN code level.
FSSAI (Food Safety and Standards Authority of India) certification needs to be obtained in parallel with GST registration, and for imported food, a separate FSSAI import license is also required. Building a system to manage these regulations comprehensively is what determines success or failure in exporting to India.
GST registration is mandatory for businesses whose Aggregate Turnover exceeds 40 lakh rupees (about 7.2 million yen) (20 lakh in special category states). However, businesses selling across state lines must register regardless of turnover. A GSTIN (GST Identification Number) must be obtained separately for each state, so food companies operating in multiple states are required to register for GST in each of those states.
The HSN code (Harmonised System of Nomenclature) is based on the internationally standardized product classification and is the single most important factor in determining a food item's GST rate. For example, the same wheat flour is taxed differently depending on whether it is "unpackaged" or "packaged and branded," and yogurt classification can also change between "plain" and "flavored." Misclassification can lead to back taxes and penalties, so accurate classification by an expert is essential.
The obligation to issue e-invoices under the GST system has expanded in phases, and the current threshold is an annual turnover exceeding 5 crore rupees (1 crore = 10 million rupees) (about 87 million yen). A reduction to 2 crore has been proposed but has not yet been implemented. E-invoicing is mandatory for B2B transactions, export transactions, and government procurement.
The requirement to report to the IRP (Invoice Registration Portal) within 30 days of issuance has applied, since April 1, 2025, to businesses with an annual turnover of 10 crore rupees or more; for businesses below 10 crore, there is currently no deadline set. The penalty for violations is up to 10,000 rupees or 100% of the tax amount, whichever is higher, with an additional fine of 25,000 rupees per instance.
Small businesses with an annual turnover of 1.5 crore rupees (about 27 million yen) or less can use the "Composition Scheme." Under this scheme, instead of filing regular GST returns, they pay a flat 1% of turnover (5% for foodservice businesses) as a simplified tax. Filing frequency is also reduced to once per quarter, allowing for a significant reduction in compliance costs.
However, businesses under the Composition Scheme cannot use ITC (input tax credit) and cannot sell across state lines. When a Japanese company deals with an Indian franchisee or distributor, it needs to check whether that partner is a Composition Scheme business and assess the impact on the ITC chain.
Challenge 1: The Complexity of Product Classification There are cases where the HSN code classification of a processed food manufactured in Japan is interpreted differently on the Indian side. We recommend using the Advance Ruling system to obtain formal confirmation of classification.
Challenge 2: The Burden of Registering State by State Aiming for nationwide rollout can require obtaining up to 36 GSTINs. Using a GST Practitioner, and Local partners expanding state by state in phases through this is realistic.
Challenge 3: Inconsistencies in ITC (Input Tax Credit) If a supplier fails to file its GST return, there is a risk that the buyer's ITC will be denied. A system for regularly monitoring suppliers' GST compliance status is needed.
Challenge 4: Handling Digital Compliance E-invoices, E-way bills, and GSTR filings all require handling through online systems. India's GST portal can experience downtime and processing delays, so building solid IT infrastructure is important.
Challenge 5: the cultural gap between Japan and India causing communication friction In dealing with tax authorities and negotiating with suppliers, understanding India-specific business practices is key to smooth operations.
For monthly filings, regular businesses are required to submit GSTR-1 (sales data, due by the 11th of the following month) and GSTR-3B (a summary return of sales and purchases, due by the 20th of the following month). At year-end, GSTR-9 (the annual return) must be filed, and businesses with annual turnover of 5 crore or more also need GSTR-9C (the reconciliation statement). The requirement for a chartered accountant to audit GSTR-9C was abolished in 2021, and it is now a self-certified form completed by the business itself.
Missed or late filings incur a late fee of 50 rupees per day (25 rupees each for CGST and SGST). False filings can also draw a penalty equal to 100% of the tax amount, so accurate and timely filing is extremely important as a matter of business risk management.
The GST 2.0 reform brings both a "tailwind" and a "headwind" for Japanese food companies. On the tailwind side, the expanded tax exemption for necessity categories has made it easier for Japanese-style health foods and organic products to be price-competitive. Prepared foods containing 70% or more millet flour by weight are treated differently depending on packaging, 0% when sold loose and 5% when packaged and labeled (this was decided at the 52nd GST Council meeting in October 2023, not a change brought by GST 2.0). On top of this, there is a business opportunity in blending Japanese millet-based health foods with India's traditional millet food culture.
The headwind, on the other hand, is the beverage business. Carbonated soft drinks and caffeinated beverages (HSN 2202) sit in Schedule III at 40%, so a profit model here needs to assume this high tax rate. For processed foods, the old pattern of "premium items carry high rates" no longer holds, so checking the rate for the specific HSN before entering the market is essential. Imports from Japan are subject to IGST on top of Basic Customs Duty, but the IGST rate matches the rate for domestic sales, so it is not a structure where GST is inherently higher simply because a product is imported. Whether to switch to local production should be decided not by the tax rate difference but by Basic Customs Duty, logistics costs, and whether input tax credit (ITC) can be used. Hiring local talent and securing a manufacturing base within India is the key to medium- to long-term tax optimization.
GST 2.0 effectively reorganized the previous five-tier rate structure into four tiers. The 12% slab was abolished, with affected items redistributed into either 5% or 18%. In the food sector, many necessities became tax-exempt, and overall the direction has been toward lower rates.
Chocolate, pasta and instant noodles, and cheese are all at 5%, whether imported or domestically produced. They were lowered from 18% or 12% under GST 2.0 (effective September 22, 2025). Food items remaining at 18% are limited to a small handful, such as artificial honey. For pizza, the dough (pizza bread) is at 5%, while a finished frozen pizza requires individual confirmation, since its HSN classification has been decided inconsistently. Carbonated soft drinks and caffeinated beverages, meanwhile, are at the highest rate of 40%, so a beverage business needs a profit model built around this high rate.
At the time of import, Basic Customs Duty is levied, and IGST, at the same rate as domestic sales, is added on top. For some items, an Agriculture Infrastructure Cess is also added, which can raise the effective tax rate. Imports also require a separate FSSAI import license, so building a system to handle this in parallel with GST registration is necessary.
Registration becomes mandatory for businesses that exceed a certain annual turnover. However, businesses selling across state lines must register regardless of turnover. Since a GSTIN is obtained separately for each state, food companies operating in multiple states are required to register in each of them.
Small businesses below a certain turnover can use the Composition Scheme, which reduces compliance costs through a simplified tax rate on turnover and less frequent filing. However, input tax credit cannot be used and cross-state sales are not possible, so it is important to note that if a business partner uses this scheme, it affects the chain of input tax credit.
A comprehensive analysis of GST impact before entering the market, engaging a trustworthy local tax advisor early, building digital infrastructure, and optimizing input tax credit across the entire supply chain are considered essential. In particular, since misclassifying an HSN code can lead to back taxes, it is recommended to obtain formal classification confirmation through the Advance Ruling system beforehand.
India's GST system is not merely a tax procedure; it is a core management factor that affects business model design, pricing strategy, supply chain construction, and partner selection alike. The GST 2.0 reform has moved the system toward simplification, but the still-complex classification system, state-by-state registration requirements, and digital compliance remain high hurdles for Japanese companies.
Success requires four things: a comprehensive analysis of GST impact before entering the market, engaging a trustworthy local tax advisor early, building digital infrastructure, and optimizing ITC across the entire supply chain. Placing GST strategy at the core of business strategy leads to building sustainable competitive advantage in India's food market.
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