Industry seeks major reforms on input tax credit rules to boost cash flows, operational efficiencies: Sources

In yet another plea to improve the intricacies under the Goods and Services Tax (GST) regime, financial experts and industry leaders have approached the government, proposing a series of sweeping reforms aimed at easing the bottlenecks for the industry, particularly with regard to the Input Tax Credit (ITC) framework.

The move comes amid widespread concerns about mounting credit accumulation and liquidity constraints faced by businesses under the current GST system, which has been impacting business liquidity, said sources familiar with the development.

“The current system has created substantial working capital challenges for businesses across sectors, prompting calls for immediate intervention,” said sources quoting the representations, which have been submitted to the revenue department at the Finance Ministry.

Also, as part of these representations, there are recommendations “seeking a comprehensive review of the ITC mechanism, with the aim to address structural bottlenecks that have stifled working capital efficiency across sectors. Key issues identified include mandatory cash payments under the Reverse Charge Mechanism (RCM), the inability to transfer credits between different branches of the same company, and the lack of a streamlined refund process for unutilised ITC,” sources added.

Industry claims that “businesses are facing ITC accumulation due to multiple factors, including the absence of corresponding outward supplies, mandatory cash payments under the Reverse Charge Mechanism (RCM), and restrictions on transferring accumulated ITC between distinct entities. These issues have particularly impacted companies in their early stages and those with high capital outlays,” said sources.

Key reforms proposed by industry

One of the most significant proposals calls for allowing businesses to use their accumulated ITC to discharge RCM liabilities. Under the current regime, companies must pay such taxes in cash, even when they possess sufficient input credit. Experts argue that this places unnecessary financial strain on businesses, especially those in capital-intensive or early-growth stages.

“This reform would align India’s GST practices with those in the European Union and Singapore, where fully creditable businesses do not bear a cash burden under reverse charge provisions,” said a senior tax expert who did not wish to be named.

Another major recommendation involves introducing a systematic refund mechanism for ITC accumulated at the end of each financial year.

“The suggested model draws from the practices in the United Kingdom and Italy and includes two possible approaches: allowing refunds for credits unlikely to be utilised within three years, or enabling businesses to claim a fixed percentage of accumulated ITC annually,” said a CFO of a leading MNC operating in India.

In a move widely welcomed by corporates, the reform package also proposes enabling the transfer of IGST and CGST credit balances between distinct persons under the same PAN—such as separate registrations of a company across different states. “Industry leaders believe this would optimise credit utilisation and improve overall business efficiency,” said sources.

Addressing long-standing industry demands

The review also calls for expanding the refund formula applicable to inverted duty structures to include ITC on input services. Currently, only inputs (goods) are eligible for such refunds, leaving service-heavy industries at a disadvantage.

Perhaps the most innovative suggestion is the creation of a mechanism to convert accumulated ITC into marketable scrips or tradable credits. This approach, similar to carbon or export scrip models, would allow businesses to monetise unused credits, thus unlocking much-needed liquidity without breaching GST compliance.

Implications for exporters and economic growth

Export-oriented businesses are expected to benefit significantly from the proposed changes, particularly through lower production costs and improved international competitiveness.

“These reforms could enable exporters to reinvest capital and expand globally, thereby positioning India more strongly in global trade,” said a prominent export association official.

Beyond individual business benefits, the proposed reforms could have a broader economic impact. By reducing blocked capital and enhancing credit flow, the changes are expected to stimulate investment, support job creation, and contribute to India’s post-pandemic economic recovery.

Looking Ahead

The proposed reforms, as per industry claims, have the potential to create a more efficient and business-friendly tax ecosystem. Industry leaders are now urging the government to act swiftly on these recommendations.

However, these recommendations are currently at the drawing board and nothing has been finalised by the revenue department, said sources.

But, if implemented, these reforms could transform the GST system from a compliance-heavy regime into a growth enabler, claim the industry representations.

The government’s response to these proposals will be closely watched in the coming months, as businesses and investors alike await decisive steps toward a more liquid and equitable ITC system.