Understanding GST Rates, HSN Codes, and ITC for Air Conditioners

Initially, air conditioners were subject to the highest Goods and Services Tax (GST) slab, contrasting with many other electronic items that experienced rate reductions. Air conditioners and large-screen televisions maintained their tax rates until the 56th GST Council meeting, which introduced significant adjustments to their tax structure, aiming to enhance affordability.

Key Points: The 56th GST Council meeting announced important updates with changes effective from September 22, 2025:

• The GST on air conditioning units has been lowered from 28% to 18%.

How Air Conditioner Prices Changed Post-GST Adjustments

Before the implementation of GST, consumer durables like air conditioners faced a combined tax burden of approximately 23% to 27% through VAT and excise duty, varying by state. Initially, under GST, ACs were taxed at 28%, which led to an increase in retail prices. Following the 56th GST Council's decision, the GST rate for air conditioners is now set at 18%. If businesses fully pass on this tax cut, post-GST prices are expected to decrease compared to both the earlier 28% regime and many pre-GST scenarios.

The table below illustrates a price comparison before and after the GST rate adjustment:

With an 18% GST rate, consumers effectively pay ₹7,000 less than they would have under the 28% GST regime for a product with the given taxable value.

GST Application on Air Conditioners

GST is applicable to most electronic goods, including air conditioners. Following the rate rationalization by the 56th Council, India generally employs two main GST slabs: 5% for essential goods and 18% as the standard rate, in addition to a separate 40% "demerit" slab for luxury or sin items. Air conditioners are now subject to an 18% GST, reduced from 28%, effective September 22, 2025. Given increasing temperatures and evolving consumer demands, air conditioners are no longer categorized as luxury items for taxation purposes; they are taxed at the standard 18% slab, similar to other appliances.

Determining the Value of Supply for Air Conditioner GST Calculation

Under GST, any supply is considered a taxable event. The term "supply" encompasses various transactions such as sales, exchanges, transfers, rentals, leases, and disposals. The value of supply is equivalent to the transaction value. The transaction value represents the price paid or payable for the supply of goods or services. In scenarios involving the sale of air conditioners, suppliers frequently offer installation services as part of the package. Therefore, the supply of the air conditioner and its installation are naturally bundled and typically provided together in the usual course of business. This constitutes a composite supply where the primary supply is the air conditioner, and installation charges are incidental. Consequently, the value of supply includes both the sale value of the air conditioner and its installation charges.

GST Rate and HSN Code for Air Conditioners

According to the 56th GST Council's decisions, all air-conditioning machines falling under HSN Chapter 8415 are now taxed at 18%, effective September 22, 2025.

Input Tax Credit (ITC) Availability and Reversal for Air Conditioners

Under GST, any registered individual is eligible to claim Input Tax Credit (ITC) on the procurement of goods or services intended for use in the course or furtherance of their business. However, Section 17(5) restricts ITC on goods or services received by a taxable person for the construction of immovable property, excluding plant and machinery, for their own use in business operations. First, it is important to define immovable property. Section 3(26) of the General Clauses Act, 1897, defines immovable property as "things attached to the earth or permanently attached to the walls and building." Although air conditioners are mounted on walls, they can be detached and reinstalled elsewhere. Thus, an air conditioner is not considered immovable property. Conversely, a centralized AC system is typically classified as plant and machinery, not immovable property, and therefore, the restrictions under Section 17(5) should not apply. It is crucial to ensure that the cost of the air conditioner is recorded separately as plant and machinery and not included in the building's cost. Furthermore, if the AC is installed in an office or factory for business purposes, ITC generally becomes available. Nevertheless, if the supply involves both taxable and exempt goods, an ITC reversal must be performed in accordance with Rule 42 and Rule 43 of the CGST Rules.

GST on Imported Air Conditioners

To encourage the sale of domestically manufactured goods, the government has maintained high import duties on air conditioners. The increase in import duties aims to deter Indian companies from importing components from abroad and instead promote the use of locally produced goods. The following taxes apply to the import of air conditioners:

• Basic customs duty: 20% of the assessable value.
• Integrated Goods and Services Tax (IGST): 18% of the assessable value plus basic customs duty.
• Social welfare surcharge: 10% of the assessable value plus basic customs duty plus IGST amount.

GST Exemptions for Air Conditioners

Currently, there are no exemptions available under GST for the sale of air conditioners.

Impact of GST on Air Conditioner Pricing

Under the previous VAT regime, consumer durables typically faced taxes of approximately 12.5%–14.5% (depending on the state) along with 12.5% excise duty and cess, leading to an overall tax burden of 25%–27% on air conditioners. With GST, the rate on air conditioners has been reduced to 18% from 28%. If this reduction is fully passed on to consumers, the final price should be lower compared to the previous 28% slab. A significant benefit is that manufacturers and dealers can now claim Input Tax Credit on raw materials, thereby eliminating the cascading effect of taxation.