GST credit reforms may unlock Rs 60,000-cr for industry

“If accumulated input tax credit (ITC) attributable to input services and capital goods is also brought within the refund mechanism, the pool could increase by Rs 50,000-60,000 crore annually, subject to the final eligibility criteria and the refund methodology,” a tax expert said.

Another tax expert at a leading consultancy estimated the ITC currently stuck in the system at around Rs 50,000 crore. However, “this does not mean the entire amount will flow into the system immediately,” the expert cautioned, adding that the actual benefit would depend on grandfathering provisions and the expenditure eligible for refunds. “If the machinery component (of refunds) is actually released over five years, as reported, the annual cash-flow or ITC benefit could be materially smaller at the beginning,” the expert said. A public finance economist also concurred with these estimates.

All three requested anonymity, as the final numbers could change depending on the fine print of the measures the Council approves.

The GST reforms are likely to be implemented in a staggered manner, starting April 1, 2027.

The impact of the proposed changes to the ITC framework is expected to be most visible in sectors such as pharmaceuticals, textiles, footwear, fertilisers, renewable energy and electric vehicles, experts said. These sectors have faced instances of GST on finished products being lower than the tax paid on several inputs and services, resulting in credit accumulation and working-capital blockages.

As reported earlier, the Council is expected to allow refunds of taxes paid on services and plant and machinery, in addition to raw materials. Businesses may be able to recover tax paid on equipment and machinery over five years, matching the asset’s useful life.

The invoice-matching system, which will link sellers’ reports with buyers’ claims and map input-output ledgers with summary returns, is expected to ensure that tax liability arising from a supplier’s default is restricted to the defaulter. This could reduce compliance hassles for other taxpayers in the supply chain.

The Council is also expected to allow ITC on outdoor catering, group health and life insurance, telecommunication towers, and vehicles with seating capacity of up to 13 persons, along with their insurance, servicing and upkeep. ITC may also be allowed on the leasing and hiring of vehicles. These measures are expected to free up credit and improve working capital for businesses.

Another decision expected on Wednesday is faster acknowledgement of refund claims, with the tax authorities required to acknowledge claims within 10 days. The acknowledgement may be deemed to have been issued if it is not provided within the stipulated period.

“The GST Council’s proposed five-year staggered cash refund framework for capital goods marks a landmark structural correction, successfully resolving a decade-long distortion in India’s trade architecture,” said Sivakumar Ramjee, executive director—indirect tax, Nangia Global.

The current inverted-duty refund outgo is estimated at around Rs 30,000 crore annually, largely pertaining to eligible ITC on inputs. The proposed ITC on employee group health and life insurance is estimated to release more than Rs 5,000 crore for corporates, while around Rs 2,500 crore of compensation cess credit is reportedly stranded with automobile dealers.

“While the ultimate velocity of these cash payouts will depend heavily on the digital infrastructure of the GST portal and the precision of the forthcoming operational guidelines, the policy intent marks a pivot in India’s fiscal administration,” Ramjee said.

“Allowing fully the credit of tax paid on inputs, input services and capital goods to all GST taxpayers, barring composition dealers, used for business purposes will unlock thousands of crores of rupees that are currently either forming part of the cost of goods sold/services provided or remain outstanding in the books of accounts for years together, resulting in working-capital blockage,” said Rahul Renavikar, managing director at Acuris Advisors.