GST reforms: Nine years after the introduction of the goods and services tax (GST), the government is turning its attention to the costs imposed by its administration. The GST Council’s recommendations of October 8, 2026, address long-standing business complaints about delayed refunds, cumbersome registration and the denial of input tax credit. The aim is to make compliance less burdensome for businesses that have struggled with procedures that often fall short of the original promise of a unified national market.
The September 2025 rate rationalisation simplified the tax structure and lowered rates on several goods and services. The latest proposals deal with a different problem. Businesses encounter the tax system through routine filings, refund claims, registration changes and scrutiny by tax officials. Delays and disputes in these areas can tie up working capital and divert staff from their regular work. Reducing such costs could yield benefits even where tax rates remain unchanged.
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The figures following last year’s rate cuts offer some grounds for optimism. According to Finance Ministry data cited in reports, taxable supplies rose 25.8% to ₹50.58 lakh crore, while supplies reported to consumers increased 26.7% to ₹7.58 lakh crore. Gross tax liability rose 13.6% to ₹6.64 lakh crore. The effective tax rate on domestic goods and services subject to GST fell from 14.55% to 13.13%. The reporting period for these figures should be confirmed against the original data before publication.
GST revenue growth has also remained strong, with reported growth of 14.7% during June-August. The figures suggest that lower effective rates need not prevent the tax base from expanding. They do not, however, establish that the rate cuts alone produced the increase. The more immediate test of the latest proposals is whether simpler procedures and quicker refunds can reduce the cost of doing business without compromising revenue collection.
Faster GST refunds can ease working-capital pressure
Businesses interact with the GST administration far more often through routine filings, refund claims and registration changes than through revisions to tax rates. Each delayed refund or avoidable notice consumes staff time and may force a business to borrow to meet its operating expenses.
Refunds are therefore among the most consequential elements of the Council’s recommendations. Under GST, input tax credit (ITC) allows a business to offset tax paid on eligible purchases against its tax liability. But when the tax rate on inputs exceeds the rate on the final product, an inverted duty structure can leave a business with accumulated credit that it cannot readily use.
Textiles, footwear, pharmaceuticals and other manufacturing industries can face this problem. The Council has recommended extending refunds to accumulated ITC on input services under an inverted duty structure for credit availed from November 1, 2026. Eligible credit on capital goods will also qualify for refunds from April 1, 2027, with the amount spread over 60 months. The recommendations also cover specified cases involving zero-rated supplies.
The proposed process changes should reduce waiting times. The period for acknowledging a refund claim would fall from 15 days to 10 days. If the department issues neither an acknowledgement nor a deficiency memo within that period, the claim would be deemed acknowledged. The wider reform package also provides for system-based processing of eligible refunds and automatic refunds of excess balances in electronic cash ledgers.
For businesses operating on thin margins, money locked up in tax credits cannot be used to pay suppliers, buy raw materials or meet payroll. Quicker refunds can reduce working-capital requirements and the interest expense incurred while businesses wait for money due to them. The benefit will depend on how consistently the system applies the new timelines and how effectively it resolves claims that require further scrutiny.
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Genuine buyers need protection from suppliers’ defaults
A persistent weakness in GST administration is the risk faced by a buyer who has a valid invoice, has received the goods and has paid the supplier, but may still lose ITC if the supplier fails to meet tax obligations. A business should not automatically bear the consequences of another party’s default when it has complied with its own legal obligations.
The Council has asked a committee of officers to examine safeguards for genuine buyers. This is a welcome step, although the protection will depend on the conditions eventually prescribed. The rules must distinguish honest buyers from those participating in fraudulent transactions, while giving taxpayers a fair and workable process to challenge the denial of credit.
The Council has also recommended widening ITC eligibility for specified business expenses. These include employee health and life insurance, outdoor catering, telecommunications towers, pipelines outside factory premises, free samples and goods destroyed or written off on expiry where destruction is required by law. Such changes could reduce tax cascading, in which taxes embedded in business costs are carried forward into the price of the final product. Their practical value will depend on the final rules and the clarity with which tax officials apply them.
Enforcement should target evasion, not routine errors
The Council has recommended removing arrest powers under GST, raising the prosecution threshold from ₹1 crore to ₹5 crore and reducing the general penalty from ₹25,000 to ₹10,000. It has also recommended a ₹10,000 materiality threshold for issuing GST notices. Taken together, these measures seek to make the consequences of non-compliance more proportionate to the offence and the amount involved.
The case for reform is strengthened by the volume of low-value discrepancies that enter the system. According to figures cited by the government, about 95,000 system-generated notices are issued annually over mismatches between tax returns, while recovery against the amounts involved is only about 0.08%. The government has said that many discrepancies arise from data-entry errors. When a mismatch produces a notice despite little or no recoverable tax being at stake, both the taxpayer and the administration incur costs with limited fiscal return.
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The Council has proposed greater use of automated invoice matching and network analysis to identify suspicious ITC claims. These tools could help officials focus on transactions that show signs of evasion instead of treating every mismatch as evidence of wrongdoing. Their effectiveness will depend on the quality of the data, the reliability of risk assessments and the availability of a meaningful appeal process when automated systems make mistakes.
Removing arrest powers and raising prosecution thresholds should not leave serious evasion unchecked. The objective should be to distinguish deliberate fraud from errors that can be corrected, and to reserve the strongest enforcement measures for cases that warrant them. A system that imposes penalties without adequate regard to intent or materiality can undermine trust; one that fails to detect deliberate fraud can reward non-compliance.
Simpler registration can help small businesses expand
The Council has also recommended redesigning registration forms, automating routine changes to registrations and gradually automating cancellations, beginning with smaller taxpayers. These measures could spare businesses repeated interactions with officials over changes that can be verified through existing records.
Small online sellers may also find it easier to expand beyond their home state. Under the proposed arrangement, eligible sellers would be able to use an e-commerce operator’s warehouse in another state as their principal place of business there, subject to specified conditions and the operator’s consent. This could reduce an administrative obstacle for businesses that want to reach customers across India without establishing separate premises in every market.
The gains from these reforms will depend on implementation. Automated registration must not become a new source of arbitrary rejection, and simplified filing must remain accessible to businesses with limited accounting support. Taxpayers also need clear guidance on when new provisions take effect and how they apply to pending claims and disputes.
GST has moved from the initial task of establishing a common indirect tax system towards the harder work of making that system predictable and proportionate. The latest recommendations address several long-standing business complaints. Their success will be measured by whether refunds arrive on time, genuine buyers retain eligible credit and businesses spend less effort responding to avoidable notices, without giving tax evaders greater room to operate.