GST on UHT Milk and Packaged Breads: NIL Rate Notification 2026

The GST Council, in its June 2026 meeting, has recommended that UHT (Ultra High Temperature) processed milk and pre-packaged breads be moved to the NIL rate category under the Goods and Services Tax framework. The Central Board of Indirect Taxes and Customs (CBIC) has issued Notification No. XX/2026-Central Tax (Rate) giving effect to this decision. This means UHT milk classified under HSN 0402 and pre-packaged breads under HSN 1905 will attract 0% GST, down from the earlier applicable rate of 5%. The change directly impacts dairy processors, bread manufacturers, FMCG companies, distributors, retailers, and e-commerce platforms dealing in these essential food items across India.

This notification reverses the controversial July 2022 amendment that had brought pre-packaged and labelled food items under the 5% GST net. For UHT milk and bread specifically, the Council has recognised that taxing these essential items at 5% created a disparity with fresh milk and loose bread (which were always NIL-rated), leading to higher consumer prices without proportionate revenue gains. The June 2026 notification restores parity and removes this tax differential.

What Changed: The June 2026 GST Rate Notification Explained

The June 2026 notification amends Schedule I of Notification No. 2/2017-Central Tax (Rate), which lists goods attracting NIL GST. Two specific entries have been added to this schedule:

1. UHT Processed Milk (HSN 0402): All forms of ultra-high temperature treated milk, whether whole, toned, double-toned, skimmed, or standardised, sold in any form of packaging (tetra packs, pouches, bottles, or cartons) now attract NIL GST. This includes both branded and unbranded variants.
2. Pre-Packaged and Labelled Bread (HSN 1905): All plain bread varieties including white bread, brown bread, whole wheat bread, and multi-grain bread sold in pre-packaged and labelled form now attract NIL GST. This covers sliced bread, unsliced bread, bread rolls, and buns without added sugar, chocolate, or cream.

Simultaneously, corresponding entries in Schedule I of Notification No. 1/2017-Central Tax (Rate) (which listed these items at 2.5% CGST, totalling 5% with SGST) have been deleted or amended to exclude UHT milk and qualifying bread products.

Timeline of GST Rate Changes on Milk and Bread

The July 2022 amendment (introduced via the 47th GST Council meeting recommendations) had defined "pre-packaged and labelled" as commodities in packages meant for retail sale under the Legal Metrology Act, 2009. The June 2026 notification effectively renders this classification irrelevant for UHT milk and bread by exempting them regardless of how they are sold.

HSN Code Classification: Understanding the Scope

Correct HSN classification determines whether a product qualifies for the NIL rate. Businesses must carefully verify their products against the following classification structure:

Products That Do NOT Qualify for NIL Rate

• Milk powder (skimmed/whole) - remains at 5% GST under HSN 0402
• Condensed milk and evaporated milk - remains at 5% GST
• Flavoured milk and milkshakes - 12% GST under HSN 2202
• Paneer, cheese, butter, ghee - retain existing rates (5%/12%)
• Cakes, pastries, biscuits - 18% GST under HSN 1905
• Bread with chocolate, cream, or fruit fillings - 18% GST
• Rusks and toasted bread - 5%/18% depending on classification

Impact on Dairy Processors and Milk Companies

The NIL rate notification fundamentally changes the financial dynamics for dairy processors. While the headline benefit is zero GST on output, the hidden cost lies in the complete loss of Input Tax Credit (ITC) on all inputs used for UHT milk production.

Financial Impact Assessment

Consider a dairy processor purchasing raw milk, processing it through UHT treatment, packaging in tetra packs, and distributing through cold chain logistics. Under the previous 5% GST regime, the processor could claim ITC on:

• Packaging materials (tetra packs, pouches, caps) — 18% GST on procurement
• Processing machinery and equipment — 18% GST on capital goods
• Electricity and fuel — applicable GST rates
• Logistics and transportation — 5%/12%/18% GST on freight
• Professional services (quality testing, lab services) — 18% GST
• Rent and warehousing — 18% GST on commercial rent

With the output supply becoming exempt, none of this ITC is claimable. For large dairy cooperatives and private processors, this ITC loss can amount to 3-4% of revenue, partially offsetting the 5% GST removal on output. The net consumer benefit therefore depends on how companies adjust their pricing.

What Dairy Businesses Must Do Immediately

1. Recalculate product costing: Factor in ITC loss as an additional cost element
2. Separate ITC tracking: Maintain distinct records for taxable products (flavoured milk, paneer, etc.) and exempt UHT milk
3. Apply Rule 42/43: Compute proportionate ITC reversal for common inputs and capital goods
4. Review vendor contracts: Evaluate whether vendors can offer better pre-tax pricing given the changed dynamics
5. Update ERP systems: Reconfigure SAP/Tally to classify UHT milk as exempt supply
6. File Form ITC-03: Reverse ITC on existing stock within 180 days of the notification
7. Revise MRP: Ensure anti-profiteering compliance by passing the rate benefit to consumers

Businesses needing support with GST return filing after rate changes can explore GST return filing assistance for correct reporting of exempt and taxable supplies post-notification.

Impact on Bread Manufacturers and Bakery Businesses

Bread manufacturers face a similar ITC loss scenario. The impact varies significantly based on the product mix:

Scenario Analysis by Business Type

Large bread manufacturers with dedicated bread-only production lines face the highest impact. Their entire ITC on flour (when purchased from registered dealers at 5%), packaging (18% GST), and manufacturing overheads becomes a sunk cost. Industry estimates suggest this adds approximately Rs. 1.50 to Rs. 2.50 per loaf in effective cost for large-scale producers.

Key Considerations for Bakery Businesses

• Product reclassification audit: Verify which products in your range qualify as "bread" under HSN 1905 versus bakery confectionery
• Separate production tracking: If you produce both exempt bread and taxable bakery items on shared equipment, maintain detailed usage logs for ITC apportionment
• Staff training: Invoice preparers must understand which items are exempt and which remain taxable
• Update price lists: Remove GST component from bread MRP and communicate changes to distributors

ITC Reversal Mechanics: Rule 42, Rule 43, and Form ITC-03

The ITC reversal requirement is the most critical compliance action for affected businesses. Here is the detailed mechanism:

Rule 42 — Reversal on Inputs and Input Services

Under Rule 42 of CGST Rules, 2017, when a registered person makes both taxable and exempt supplies, ITC on inputs and input services used commonly must be apportioned:

1. Step 1: Identify ITC exclusively attributable to taxable supplies — fully eligible
2. Step 2: Identify ITC exclusively attributable to exempt supplies (UHT milk/bread) — fully ineligible
3. Step 3: For common ITC, calculate proportionate credit using the formula: Common ITC × (Exempt Turnover ÷ Total Turnover) — this portion must be reversed
4. Step 4: The reversal must be done monthly in GSTR-3B and reconciled annually

Rule 43 — Reversal on Capital Goods

For capital goods used for both taxable and exempt supplies, Rule 43 prescribes a useful life of 60 months (5 years). The ITC attributable to exempt supplies for each tax period is calculated as:

ITC on capital good × (Exempt supply turnover ÷ Total turnover) ÷ 60 months

This means if you purchased a UHT processing plant at Rs. 5 crore with Rs. 90 lakh ITC, and 70% of output is now exempt UHT milk, you reverse Rs. 90,00,000 × 0.70 ÷ 60 = Rs. 1,05,000 per month until the asset's useful life is exhausted or circumstances change.

Form ITC-03 — Transitional Stock Reversal

Under Section 18(4) of the CGST Act, when goods or services become wholly exempt, the registered person must pay an amount equal to the ITC on inputs held in stock, inputs in semi-finished goods, and inputs in finished goods on the day immediately preceding the notification date. This amount must be paid through Form GST ITC-03 within 180 days.

Compliance Changes: GST Return Filing Adjustments

Both dairy and bakery businesses must make several compliance adjustments in their regular GST filings:

GSTR-1 (Outward Supply Statement)

• UHT milk and exempt bread must be reported in Table 8 — Nil-rated, Exempt, and Non-GST supplies
• Remove these items from Table 4 (taxable B2B supplies) and Table 7 (taxable B2C supplies)
• HSN summary (Table 12) must reflect NIL rate against HSN 0402 and HSN 1905 for qualifying products
• Ensure e-invoicing systems exclude these items from taxable invoice generation (though B2B documentation remains necessary for commercial purposes)

GSTR-3B (Summary Return)

• Exempt supply values move to Table 3.1(c) — Nil-rated and Exempt supplies
• ITC reversal amounts appear in Table 4(B) — ITC reversed
• Ensure auto-populated figures from GSTR-2B are correctly adjusted for the changed classification

GSTR-9 (Annual Return)

• Annual return must segregate turnover for the period before and after notification
• Table 5: Split between taxable outward supplies (pre-notification) and exempt supplies (post-notification)
• Table 7: Report ITC reversals under Rule 42/43 and Form ITC-03
• Table 14: Differential tax paid for different periods of the financial year

For accurate GSTR-9 filing with correct bifurcation of taxable and exempt turnover, see annual return filing assistance.

GST Registration Implications

The notification raises important questions about GST registration for businesses dealing primarily in newly exempted products:

When Registration May No Longer Be Required

Under Section 23(1)(a) of the CGST Act, 2017, persons exclusively engaged in supplying goods or services that are wholly exempt from tax are not liable for registration. This means:

• A retailer dealing only in fresh milk, UHT milk, and plain bread — all now NIL-rated — may apply for cancellation of GST registration
• Small milk distributors who previously registered only because UHT milk was taxable at 5% can surrender their registration
• Bakeries selling only plain bread varieties (no biscuits, cakes, or taxable items) can opt out

When Registration Should Be Maintained

• Businesses with mixed supplies (exempt milk/bread plus taxable products) must continue registration
• Businesses engaged in inter-state supply of any goods (even exempt) should retain registration for documentation and movement of goods
• Businesses wanting to voluntarily maintain registration for commercial credibility or future business diversification
• E-commerce sellers — mandatory registration under Section 24 regardless of exemption

Businesses opting for cancellation must file a final return in Form GSTR-10 within three months of the cancellation date or the cancellation order date, whichever is later. Any ITC balance in the electronic credit ledger must be reversed in this final return.

Anti-Profiteering Obligations: Passing the Benefit to Consumers

Section 171 of the CGST Act, 2017 mandates that any reduction in the rate of tax on any supply of goods or services must be passed on to the recipient through a commensurate reduction in prices. This is enforced by the Competition Commission of India (CCI), which has absorbed the functions of the erstwhile National Anti-Profiteering Authority (NAA).

How to Calculate the Price Reduction

For a product previously sold at Rs. 100 (inclusive of 5% GST):

• Base price: Rs. 100 ÷ 1.05 = Rs. 95.24
• GST component: Rs. 4.76
• New price (NIL GST): Rs. 95.24 (the full Rs. 4.76 must be passed on)

However, businesses can argue that the loss of ITC increases their cost. The CCI considers such claims on a case-by-case basis, but the initial obligation is to reduce the MRP by the full GST amount. Businesses must maintain detailed cost analysis records to justify any price retention above the computed reduced price.

Documentation Requirements

1. Maintain pre and post-notification price lists with breakup
2. Keep records of all ITC reversed and the cost impact calculation
3. Document board resolutions or management decisions on revised pricing
4. Retain evidence of MRP changes on physical packaging
5. Update prices on e-commerce platforms and communicate to distributors in writing

E-Commerce and Marketplace Implications

E-commerce operators (Amazon, Flipkart, BigBasket, Blinkit, Zepto, and similar platforms) face specific compliance adjustments:

TCS (Tax Collected at Source) Changes

Under Section 52 of the CGST Act, e-commerce operators collect TCS at 1% (0.5% CGST + 0.5% SGST) on the net value of taxable supplies made through their platform. Since UHT milk and bread are now exempt:

• TCS must not be collected on these product categories from the notification date
• Platform systems must reclassify these products as exempt in catalogue management
• GSTR-8 (TCS return) must exclude these supplies from the taxable value
• Sellers on these platforms should verify that TCS is not being deducted on exempt supplies post-notification

Quick Commerce and Grocery Delivery Platforms

Quick commerce platforms that heavily feature milk and bread in their product catalogues will see a meaningful reduction in TCS liability. For a platform processing Rs. 100 crore monthly in UHT milk and bread sales, the TCS reduction amounts to Rs. 1 crore per month — funds that previously got locked in the sellers' cash ledger until claimed in returns.

Marketplace Seller Obligations

• Update product listings to reflect 0% GST on qualifying items
• Ensure platform-generated invoices show NIL tax on UHT milk and bread
• Verify that platform reconciliation statements (GSTR-2B) correctly exclude these from taxable purchases
• Small sellers exclusively dealing in exempt items can consider voluntary deregistration (except those mandated under Section 24)

Transition Provisions and Stock Management

Managing the transition from taxable to exempt status requires careful handling of existing inventory:

Stock Held on the Notification Date

Under Section 18(4) of the CGST Act read with Rule 44(4) of CGST Rules:

1. Finished goods (UHT milk/bread) in stock: ITC embedded in these goods must be reversed. Calculate as ITC on inputs used in manufacturing the goods. If exact attribution is not possible, use the formula prescribed in Rule 44.
2. Raw materials in stock: ITC on flour, packaging materials, additives, and other inputs lying in stock that will be used exclusively for exempt products must be reversed.
3. Semi-finished goods: Work-in-progress items (milk being processed, bread dough in production) — ITC on inputs consumed must be reversed proportionately.

Practical Transition Steps

1. Physical stock count: Conduct inventory verification on the notification effective date
2. ITC computation: Calculate ITC embedded in each category of stock
3. Payment: Pay the reversal amount through electronic cash ledger (DRC-03 or ITC-03 as applicable)
4. Record maintenance: Preserve stock verification records for a minimum of 72 months (6 years) as per Section 36 retention requirements
5. System updates: Change product tax codes in ERP from the exact notification effective date

Impact on Exports of UHT Milk

India exports UHT milk to several countries in South Asia, the Middle East, and Africa. The GST exemption creates a unique challenge for exporters:

Export Under LUT vs. Export With IGST Payment

Previously, UHT milk exporters could:

• Export under Letter of Undertaking (LUT) without paying IGST and claim refund of accumulated ITC on inputs
• Export with payment of IGST and claim refund of the IGST paid

Now that UHT milk is an exempt supply domestically:

• The supply remains zero-rated for exports under Section 16 of the IGST Act (zero-rated supply definition covers both exempt and taxable goods when exported)
• However, since the domestic supply is exempt, ITC on inputs is not available, meaning there is no accumulated ITC to claim refund on
• Exporters who previously benefited from ITC refunds will see their export competitiveness reduced
• The effective cost of export increases by the amount of blocked ITC on inputs

Options for Exporters

Exporters may consider maintaining separate records for export production if they can demonstrate that exported goods are not exempt but zero-rated. However, this interpretation remains contested and awaits clarification from CBIC. Exporters should consult with Tax Professionals and monitor CBIC circulars for guidance on ITC treatment for exports of domestically exempt goods.

Comparison: Before and After the June 2026 Notification

Action Items for Affected Businesses

Based on the notification, businesses must undertake the following actions within specific timelines:

Immediate Actions (Within 7 Days of Notification)

1. Update billing systems: Configure ERP, POS, and accounting software to apply 0% GST on UHT milk and qualifying bread products from the exact effective date
2. Communicate to distributors and retailers: Issue revised price lists and circulars confirming the new rates
3. Stop collecting GST: Ensure that no GST is charged on invoices for exempt supplies post-notification
4. Train accounts team: Brief your finance and billing staff on changed HSN classifications and reporting requirements

Short-Term Actions (Within 30 Days)

1. Conduct stock audit: Document all inventory of UHT milk and bread (finished goods, raw materials, WIP) as on the notification date
2. Calculate ITC reversal: Compute the ITC embedded in transitional stock and initiate reversal
3. Revise ITC computations: Implement Rule 42/43 apportionment for common inputs going forward
4. Update MRP: Revise maximum retail prices on packaging to reflect the rate reduction
5. Notify e-commerce platforms: Ensure marketplace listings are updated with correct tax classification

Medium-Term Actions (Within 180 Days)

1. File Form ITC-03: Submit the transitional ITC reversal declaration to the GST portal
2. Evaluate registration status: Determine if GST registration should be surrendered (for exclusively exempt dealers)
3. Review contracts: Renegotiate supply agreements where ITC loss impacts pricing arrangements
4. Anti-profiteering compliance: Maintain documentation of price reductions and cost impact analysis
5. Annual return preparation: Begin segregating turnover data for correct GSTR-9 reporting

New dairy or bakery businesses needing GST registration with proper HSN classification can explore GST registration assistance.

FSSAI Compliance: Unchanged But Important

While the GST rate change is significant, businesses must remember that food safety compliance under FSSAI remains fully applicable. The GST exemption does not reduce any FSSAI obligations:

• UHT Milk Processors: Must hold FSSAI Central License (turnover above Rs. 12 crore) or State License. UHT processing facilities must comply with FSSAI Food Safety and Standards (Licensing and Registration of Food Businesses) Regulations, 2011
• Bread Manufacturers: Must maintain FSSAI license with product approval for each bread variety. Labelling must comply with FSSAI Food Safety and Standards (Labelling and Display) Regulations, 2020
• Retailers: Must hold at minimum an FSSAI Registration for selling packaged food items
• E-Commerce Food Platforms: Must hold FSSAI license and display license number on the platform

The interplay between GST exemption and FSSAI compliance means businesses can simplify their tax compliance but must continue investing in food safety standards, quality testing, and labelling compliance.

Dairy and bakery businesses require valid FSSAI licensing regardless of GST status. For help with this, see FSSAI license assistance.

Key Takeaways and Related GST Changes

The UHT milk and bread exemption is part of a broader set of GST rate rationalization measures recommended by the Council in June 2026. Businesses should be aware of other changes that may affect their operations:

• GST Rate Overhaul 2026: Multiple slab adjustments across goods and services — read the detailed analysis of slab changes
• Health Insurance GST Exemption: Certain health insurance premiums exempted from GST — learn about the health insurance exemption
• Food and beverage sector: Several FMCG items under review for rate rationalization in subsequent meetings

The GST Council has indicated that further rationalization in the food and essential items category may follow in subsequent meetings, with a focus on reducing the inverted duty structure and aligning rates with the principle of taxing essential goods at the lowest possible rates.

The June 2026 NIL rate notification for UHT milk and pre-packaged bread represents a significant consumer-friendly move that simplifies the tax treatment of essential food items. However, businesses must carefully manage the transition to avoid compliance pitfalls:

• For consumers: Expect a reduction of approximately 4.5-5% in retail prices of UHT milk and packaged bread. Verify that the benefit is being passed on by checking revised MRP.
• For manufacturers: The ITC loss partially offsets the consumer benefit. Recalculate margins, file ITC-03, and implement Rule 42/43 apportionment rigorously.
• For retailers: Update billing systems immediately. Do not collect GST on exempt supplies — penalties apply under Section 76.
• For exporters: Evaluate the impact on export competitiveness due to blocked ITC. Monitor CBIC clarifications on zero-rated treatment.
• For e-commerce: Stop TCS collection on exempt items. Update platform catalogues and GSTR-8 reporting.
• For compliance teams: File ITC-03 within 180 days. Maintain separate tracking for taxable and exempt supplies. Prepare for anti-profiteering scrutiny.

Businesses navigating this transition should ensure their GST compliance framework is updated promptly and maintain thorough documentation for audit purposes. The combined effect of rate changes, ITC reversals, and pricing adjustments requires coordinated action across finance, operations, and legal teams.