The GST Council has approved a major procedural fix, keeping rates almost unchanged

New Delhi: The Goods and Services Tax (GST) Council, chaired by Union Finance Minister Nirmala Sitharaman, on Thursday approved one of the biggest procedural changes to the indirect tax regime since its introduction in 2017, keeping tax rates unchanged to ensure greater stability.

Among other things, the top decision-making body sought to expand and accelerate refunds to free up working capital for businesses, limit officials’ power to arrest suspected leakers, shift verification from discretionary checks by officials to system-driven risk rules, and restore certainty in day-to-day compliance.

The decisions, which have been debated for months, come at a time when India needs sustained growth in private investment to complement public investment, exporters face the fallout from war in West Asia and a more uncertain global environment, and supply chains are realigning globally.

The moves, which come a year after a wide range of GST rates were mostly reduced and rationalized, are aimed at reducing costs, easing liquidity pressures and simplifying compliance for businesses. For a country trying to boost manufacturing while strengthening the “one nation, one market” principle, these are major reforms of the second order, the benefits of which could multiply over the years.

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Structural repairs

The council has decided to set up a committee of officials to discuss whether to allow honest buyers to get credit in cases where suppliers default, Sitharaman said while briefing the media about the decisions taken. Hitherto, input tax credit was available only when the tax charged to the buyer actually reached the government. This effectively meant that the buyer’s credit depended on the supplier and, in a long chain, entities with which the buyer had no direct dealings.

While the Center has supported the proposal to protect honest buyers from foreign mistakes, some states have asked to discuss the matter, which the Union government has accepted, the minister said.

The committee is expected to submit its report within three months and any decision in this regard is planned to be implemented from April next year.

The Council also decided on a new principle aimed at expanding the refund mechanism. The refunds will now extend to GST paid not only on input goods but also on input services such as factory rent, consultancy fees and logistics, where the business claims refund due to the reverse duty structure.

The refund will also be extended to tax paid on plant and machinery over a period of five years on a declaration that the plant remains in the business.

Each GST refund claim will now have to be acknowledged within 10 days (up from the current average of 15 days) or it will be deemed acknowledged. For exporters and reverse charge cases, which account for two-thirds of all refund claims, 90% of claims will be automatically released within three days of risk review, with the balance released after verification.

Key changes

The council proposed to limit the power of GST officials to make arrests only on suspicion of tax evasion. The threshold for criminal prosecution for duty evasion will also increase ₹5 million from ₹1 crore and the general penalty will be reduced to ₹10,000 from ₹25,000. It recommended common standards for GST notifications and procedures across the country.

For smoother movement of goods, checks will now usually be carried out only in the country of origin or the country of destination, eliminating the practice of multiple checks at multiple locations. Only detention of goods based on intelligence and justified will be allowed.

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Exports have been redefined

The Council relaxed certain conditions that effectively limited export benefits. Indian firms invoicing or receiving payments through their own foreign branch will now qualify as exports. The condition that the supplier and recipient should not be establishments of the same person has been removed, making it clear that it is important whether the customer is abroad.

A contract in India for foreign-owned goods such as repair, testing, storage and processing will have the place of delivery as the customer’s place where the work is done. It will qualify as export even if the goods remain in India.

Quick registration

GST registration through automatic route under Rule 14A is proposed to be completed in just three working days, after more than three weeks, without the intervention of an officer. This will apply to applicants who do not wish to carry over a monthly input tax credit of more than ₹2.5 million. The route now covers 61% of registrations.

Similarly, the deregistration process will be streamlined by removing the requirement to visit a GST officer if the applicant has paid taxes and is not facing an investigation.

About the lawsuit, a ₹A minimum threshold of 10,000 will apply to show cause notices under Sections 73, 74 and 74A, including pending cases. Since 2017, about 11.3 million notices have been issued at or below this level – about a fifth of all cases by number, but involving a negligible amount of tax.

Bipin Sapra, Partner and Head of Indirect Tax Policy, EY India, said, “This is one of the most significant trade facilitation reforms since the introduction of GST. By extending the refund of accumulated input tax credits to input services and capital goods and rationalizing blocked credits, the Council renews GST’s core promise of seamless credit delivery.”

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States are responding

Jharkhand Finance Minister Radha Krishna Kishore proposed to keep coal out of the GST regime and allow states to collect VAT on it. It also proposed a complementary framework of resource provenance and ecological balancing to recognize states that supply exhaustible minerals to the national economy without violating the principle of destination.

“Jharkhand is contributing significantly to national energy integration and economic development, while resource depletion and long-term environmental and social burdens remain in the state. As GST on coal is passed on to consumer states on a destination basis, Jharkhand is deprived of the revenue needed to address these costs,” Kishore said.

“Punjab supports the direction of reform. Our demand is that facilitation should be accompanied by smarter enforcement. Punjab proposes that the Government of India, GSTN and the states jointly develop a common AI-based, data-driven enforcement architecture supported by a national repository integrating tax, vehicle and movement data and providing objective risk information to both central and state officials. Punjab would like to take initiative for this simple model: honest taxpayers, minimum physical intervention and maximum accuracy against fraud and tax evasion,” said Punjab Finance Minister Harpal Singh Cheema.