Process Reform Overhaul: GST Council Set to Fix Credit Blockages and Tackle Inverted Duty Crises

Process Reform Overhaul: GST Council Set to Fix Credit Blockages and Tackle Inverted Duty Crises​

The next meeting of the GST Council is anticipated to pivot heavily toward implementing process reforms, moving beyond the successful simplification of tax slabs. Government sources indicate that the focus will be on easing compliance burdens for businesses, relaxing registration processes, reducing litigation, and addressing critical issues related to inverted duty structures (IDS). The Council meeting is expected in late July or August.

Tackling Inverted Duty Structures Across Key Industries​

A major item on the agenda is resolving the systemic issues posed by inverted duty structure (IDS) across various manufacturing sectors. IDS occurs when the tax rate applied to raw materials and inputs is higher than the rate charged on final outputs. This situation causes businesses to accumulate credit that they cannot claim at the output level.

Industries facing significant credit build-up include pharmaceuticals, textiles, footwear, food processing, paper, and electric vehicles. These businesses are paying more GST when acquiring inputs than what they collect from customers upon sale of the finished product. To mitigate this cash crunch, a system-driven 90 percent provisional refund mechanism was approved in the previous meeting to provide liquidity relief.

Nitin Vijaivergia, Partner at Price Waterhouse & Co LLP, warned that allowing legitimate tax credits to remain blocked effectively transforms GST from a consumption tax into a cost. This undermines the core value-added design principle of the integrated tax system.

Future Reform Agenda and Compliance Simplification​

Beyond resolving IDS, experts anticipate the Council will focus on streamlining compliance and significantly reducing disputes. While digitization has improved tax administration generally, businesses continue to face procedural complexities and frequent systemic changes. Experts suggest the agenda must include simplifying compliance procedures and ensuring adequate implementation time for new requirements.

Rajat Mohan of AMRG Global stated that key digital initiatives are expected to be addressed. This includes working on the Invoice Management System (IMS) and improving data synchronization between e-way bill data and GST returns to reduce reconciliation challenges.

Refining Disputes and Streamlining Tax Refunds​

Improving the functionality of tax refunds and appellate tribunals is a critical area identified by industry experts. Ikesh Nagpal, Lead Indirect Tax at AKM Global, emphasized that both refunds and disputes must operate efficiently. He argued that reforming the appellate tribunal and implementing faster, time-bound refunds can substantially reduce litigation and rebuild taxpayer trust.

Nagpal also highlighted the importance of operationalizing Section 11A of the CGST Act in a transparent manner to address legacy interpretation issues. This clause empowers the government, following GST Council recommendation, to waive past tax liabilities if nonpayment was due to a generally prevalent trade practice.

Calls for Pragmatic Policy Responses​

To ensure that legitimate tax credits are not perpetually locked in the system, industry thought leaders have called for pragmatic policy shifts. Vijaivergia suggested two key directions for reform. First, targeted rate rationalization is necessary to eliminate inverted duty structures in strategically important manufacturing sectors. Second, there must be a mechanism allowing for the annual refund of residual unutilised credits.