GST@9: Building a more seamless, certainty-driven input tax credit framework

As India’s good and services tax (GST) regime approaches its ninth anniversary, it is undoubtedly clear that it has been a landmark reform that has reshaped the country’s indirect tax landscape. From subsuming multiple taxes into a unified system to building a technology-led compliance framework, GST has significantly improved transparency and formalisation across sectors. A key pillar of this framework is the removal of the cascading effect and simplification of input tax credit (ITC). Simply put, ITC allows businesses to offset the tax paid on business purchases against the tax paid on sales, ensuring that tax is applied only to the value added at each stage of the supply chain, preventing cascading of taxes.

Access to ITC has always been conditional. The law prescribes requirements, such as possession of a valid invoice, receipt of goods/services, and compliance by the supplier, alongside specific exclusions where credit is restricted. This conditional framework has constantly led to a tussle between taxpayers and authorities.

The law requires that tax charged on a supply must be deposited with the government for the recipient to claim credit. In practice, this has led to situations where genuine recipients, who have received goods or services and paid the applicable tax, are denied ITC due to defaults by suppliers. This creates uncertainty, disrupts business planning, and often results in prolonged litigation.


Over the years, the GST system has evolved to improve the process of credit verification. Earlier, businesses relied on GSTR-2A—a dynamic statement of supplier-reported invoices. While intended to promote transparency, it also led to frequent mismatches and reconciliation challenges, with differences triggering scrutiny. Recognising these issues, the system has since moved towards greater predictability with the introduction of GSTR-2B—a static, period-specific statement. This was a significant improvement, offering businesses visibility on eligible credit and reducing disputes on time differences. More recently, the rollout of the Invoice Management System (IMS) represents a shift towards real-time validation, strengthening the integrity of the credit chain, and placing greater responsibility on businesses to actively manage their credit positions.

Encouragingly, recent judicial pronouncements signal a more balanced approach. Courts have increasingly held that ITC should not be denied to bona fide purchasers solely on account of supplier non-compliance, particularly where the underlying transaction is genuine and well documented.

Another important aspect of ITC is the set of restrictions on credit availability—certain supplies are specifically ineligible for ITC, and notably, most of these restrictions have been carried forward from erstwhile tax regimes.

However, with changing times and evolving business systems, there is a pressing need to review whether certain restrictions continue to serve their intended purpose or if they only constrain legitimate business activity. For instance, restrictions on credits relating to employee welfare, such as health insurance, food, and well-being expenses, merit reconsideration. In today’s business environment, particularly in sectors such as manufacturing, technology, and digital services, operations are increasingly round-the-clock, with employees expected to support 24×7 business continuity across geographies and time zones. In such a scenario, expenditure incurred on employee health, safety, and welfare is no longer an option but a critical component of business operations. Similarly, credits blocked on construction-related activities, particularly for commercial infrastructure, also need reconsideration. Large-scale investments in data centres and digital infrastructure are critical to India’s growth story. Similarly, sectors such as airports, ports, data centres, and semiconductors—identified as strategic priorities—require significant upfront capital expenditure. Denial of ITC on such investments increases project costs and can dilute the intended policy push towards these focus sectors.

Allowing credit in these areas, would not only improve project viability but also align the GST framework with larger economic objectives—whether it is Digital India, Make in India, or the push towards emerging technology ecosystems.

As GST enters its tenth year, the focus is gradually shifting from stricter controls to creating a more predictable and business-friendly credit ecosystem. A few priorities can help shape the next phase of reform:

Compliance ease
·Technology-driven tools, such as IMS and GSTR-2B, should be leveraged to provide greater certainty and upfront visibility regarding credit eligibility. Tax liability confirmation in GSTR-3B based on the GSTR-1/1A submitted by suppliers, which ensures that the recipient can rest assured that the taxes have been deposited by the supplier.

Addressing accumulation due to inversion of duties
·Another area of focus would be inverted duty structures, which result in accumulation of ITC and significant working capital blockages, particularly for manufacturers. This issue has assumed greater significance in light of the path-breaking GST 2.0 rate rationalisation exercise. While the rationalisation measures were intended to simplify rate structure, they may in certain cases have inadvertently widened input-output tax rate mismatches. Of the 14 sectors covered under the Production Linked Incentive scheme, nearly half—including the EV segment within the automobile industry—could face such an inversion challenge, particularly where cross-product utilisation of credits is not feasible. In the absence of corrective measures, such sectors are likely to experience sustained working capital blockages, which may dilute intended benefits of industrial and manufacturing-focused policy initiatives, constraining future investments.

Working capital optimisation
ITC continues to remain one of its most critical pillars of the GST framework, supporting working capital efficiency and ensuring tax neutrality across the value chain. Addressing ITC restrictions can unlock working capital in a meaningful way. For instance, enabling utilisation of ITC for reverse charge liabilities instead of mandating cash payments can ease immediate cash flow pressures; allowing cross-utilisation of CGST credits across states can address the mismatch between credit accumulation in one location and cash outflows in another. Further, permitting refunds of unutilised credits, including those relating to capital goods, exports, or year-end balances, and allowing flexible instruments such as bank guarantees for pre-deposits can release funds otherwise locked in the system and improve operational efficiency.

With the ongoing geopolitical situation and India increasingly emerging as a preferred destination for global investments, it is imperative for the government to further strengthen the GST framework. Providing greater certainty and flexibility in ITC, particularly by easing certain restrictions, can act as a direct stimulus for industry by unlocking working capital and improving investment viability.

In a nutshell, the completion of nine years of GST implementation is not just an opportunity to reflect but to also chart the course ahead. A more balanced and predictable approach can help safeguard revenue, reduce disputes, enhance taxpayer confidence, and create a more efficient GST ecosystem for businesses.

The author is Partner & Indirect Tax Leader, Deloitte India. Views are personal