GST 2.0 set to amplify ease, unlock tax credit

India is set to implement significant reforms to the goods and services tax system, which will ease compliance. Changes may include the release of accumulated input tax credit that benefits various industries and supports growth. The GST Council plans to reconsider tax treatment for certain supplier defaults to protect genuine buyers.

New Delhi: India is eyeing a broad overhaul of the goods and services tax (GST) regime that could free up thousands of crores of accumulated input tax credit, ease compliance and raise thresholds for prosecution, with emphasis on decriminalisation.

A host of such proposals, which include rationalisation of provisions governing e-way bill requirements and removing powers to arrest under the GST law, will be taken up by the GST Council at its meeting on Wednesday. The proposals span all touchpoints for a taxpayer - from registration, returns and refunds to input tax credit and litigation - marking a shift from procedure-heavy compliance towards automated, data-driven and risk-based administration, people familiar with the matter told ET.

infographic image.

"Safeguards imposed in the early years of GST can be relaxed without weakening enforcement because of the availability of data and advancement of systems," one of them said.

These process reforms would complete the GST 2.0 makeover.

Ease of Doing Business

The revamp kicked off with last September's sweeping rate rationalisation, resetting the way the GST system interacts with businesses.

A key proposal on the table is in connection with easing input tax credit (ITC), which could provide an indirect stimulus to the industry by freeing up capital.

The council will consider allowing tax paid on plant and machinery and input services to be refunded in monthly instalments over five years, as businesses could not recover this under ITC, people cited earlier said.

The proposals also seek to widen credit for a range of business inputs that had previously remained blocked, including health and life insurance for employees, outdoor catering, telecommunications towers, pipelines outside factories, certain free samples and expired goods requiring destruction, vehicles seating up to 13 persons along with their insurance and maintenance, and leasing or hiring of vehicles.

"Unlocking blocked input tax credit under Section 17(5) can lower costs across industry and make Indian goods and services more competitive globally," said Bipin Sapra, partner at EY. "Also, refunding accumulated GST credit on inverted duty structures can turn locked-up working capital into growth capital, giving industry a capex stimulus comparable to a PLI scheme without creating a new subsidy."

The proposed credit on telecommunication towers and pipelines would address significant capital expenditure incurred by the telecom, refining, petrochemical, fertiliser, gas distribution and infrastructure sectors, people aware of the matter said.

A large number of goods in the 5% bracket, including food, pharma, textiles and electric vehicles, face inverted duty structure, leading to ITC accumulation running into thousands of crores. Releasing this stuck capital would prompt many industries to pump it back as capex, experts said.

Another key proposal is a change in the treatment of ITC when a supplier further up the chain defaults, leading to genuine buyers losing tax credit - an issue that has emerged as one of the largest causes of litigation under the GST system.

Under the proposed approach, a genuine buyer would be allowed to retain credit where the transaction is bona fide, while recovery would be directed at the supplier further up the chain who failed to pay the tax. This is possible because the system can now identify mismatched or fraudulent credit closer to its source as seller and buyer data is linked invoice by invoice, said the people cited.

Information already available with customs, the Reserve Bank of India's export monitoring system and other government systems will be drawn directly into the refund process instead of requiring taxpayers to upload documents for officers to manually examine, they noted.

Sectoral Relief

In what could offer significant relief to the IT/ITeS sectors, the council will consider allowing treatment of supplies to overseas branch offices as exports, making such transactions eligible for ITC.

Goods sold to foreign buyers but delivered in a special economic zone here could also be treated as exports if the payment is in foreign currency, people cited above said.

GST norms are also proposed to be aligned with RBI's rules regarding receipt of payment for exports.

The proposed reforms also seek to reduce low-value compliance and litigation. No show-cause notice may be issued where the amount involved is below ₹10,000, with the proposed change extending to pending cases, the sources said. Around 95,000 notices a year arise from differences between returns, with recovery against such notices amounting to only about 0.08% of the sums involved, they noted.

Small businesses with turnover of up to ₹5 crore and supplies exclusively to unregistered customers may be allowed to file returns annually with quarterly tax payments. Registration is being proposed to be eased with applicants that qualify for the automated route to be registered within three working days, a process that already covers 61% of registrations. Changes to trade name, directors or partners, and additional business addresses are also likely to move to automatic processing.