GST 2.0: Easier rules, more tax credit, no arrest powers may be on way

India is looking at another major round of changes to the goods and services tax (GST) system, with the focus now shifting from tax rates to making compliance easier for businesses.The GST Council is likely to consider a wide range of proposals at its meeting on Wednesday, including measures to unlock stuck input tax credit (ITC), simplify GST registration and returns, speed up refunds and reduce tax-related litigation. The proposals also include rationalising e-way bill rules and removing powers to arrest under the GST law, according to people familiar with the matter, reported Economic Times.The broader aim is to move GST away from a process-heavy system towards one that uses technology, data and risk-based checks to identify genuine mistakes and deliberate tax evasion.The next set of changes is being seen as the next phase of the GST 2.0 reforms. The first phase focused on a major rationalisation of GST rates last year. The Council is now looking at how the system works for businesses on a day-to-day basis.A key area under consideration is input tax credit (ITC). Several businesses have large amounts of credit stuck in the GST system, affecting their cash flows and ability to invest. The GST Council may consider allowing businesses to get refunds of tax paid on certain plant and machinery and input services in monthly instalments over five years.The proposals also seek to expand the list of business expenses on which companies can claim ITC. These could include health and life insurance for employees, outdoor catering, telecom towers, pipelines outside factories, certain free samples and expired goods that have to be destroyed.Credit could also be allowed on vehicles with seating capacity of up to 13 people, along with their insurance and maintenance. Leasing or hiring of vehicles could also be brought within the credit net.For sectors such as telecom, refining, petrochemicals, fertilisers, gas distribution and infrastructure, allowing ITC on telecom towers and pipelines could provide relief from high capital costs.Another major issue is the build-up of ITC because of inverted duty structures.Several goods in the 5% GST bracket, including food, pharmaceuticals, textiles and electric vehicles, face a situation where the tax paid on inputs is higher than the tax charged on the final product.This results in excess ITC getting accumulated with businesses. Unlocking this money could improve cash flows and give companies more room to spend on expansion and capital expenditure.The Council may also consider changes to how ITC is treated when a supplier fails to pay tax.At present, a genuine buyer can sometimes lose credit because of a default by a supplier further up the supply chain, even when the buyer has completed a genuine transaction.Under the proposed approach, a bona fide buyer could be allowed to retain the credit, while tax authorities could recover the dues from the supplier who failed to pay the tax.The move is possible because GST systems now have greater access to invoice-level data linking buyers and sellers. This can help authorities trace mismatches or fraudulent credit closer to their source.IT AND EXPORT SECTORS MAY GET RELIEFSome sector-specific changes are also being considered.For IT and IT-enabled services companies, supplies made to overseas branch offices could be treated as exports, making them eligible for ITC.Goods sold to foreign buyers but delivered to a special economic zone in India could also qualify as exports if payment is received in foreign currency.GST rules could also be aligned more closely with Reserve Bank of India rules on receiving export payments.GST COLLECTIONS REMAIN STRONGThe proposed reforms come at a time when GST collections remain strong.Vivek Jalan, Partner at Tax Connect Advisory Services LLP, said September 2026 gross GST collections crossed the Rs 2 lakh crore mark, reaching Rs 2,03,521 crore, up 14.7% from a year earlier. Net GST revenue stood at Rs 1,76,520 crore, up 18.1%.“September 2026 has emerged as another bumper month, crossing the Rs 2 lakh crore mark in gross GST collections at Rs 2,03,521 crore, reflecting a strong 14.7% year-on-year growth,” Jalan said.He said domestic revenues grew 10.1% to Rs 1,37,996 crore, while import revenues rose 25.9% to Rs 65,525 crore.However, Jalan flagged a 13.5% fall in domestic refunds in September and said this needed to be monitored to ensure businesses have enough liquidity.He also pointed to strong GST growth in states such as Karnataka, Maharashtra and Delhi, while Assam recorded an 88% rise.Jalan said the next phase of reforms should include allowing refunds of input services under the inverted duty structure, simplifying registration for large taxpayers across states and reducing GST rates on autism centres.GST REGISTRATION COULD BECOME FASTERThe Council could also look at making GST registration simpler and faster.Ranjeet Mahtani, Partner at Dhruva Advisors, said businesses are expecting a more tax-friendly GST system, particularly in areas such as registration, return filing and matching data between the GST portal and returns.“India Inc has expectations concerning a tax-friendlier ecosystem, especially in the processes of registration, returns filing, and matching of data between the common portal and returns,” Mahtani said.The Council had earlier proposed an automated three-day registration process for low-risk applicants.Biometric Aadhaar authentication for GST registration could also see a wider rollout. The move is aimed at preventing fake registrations and identity theft.RETURNS MAY BECOME MORE FLEXIBLEBusinesses could get more flexibility to correct mistakes in GST returns.One proposal is to allow preventive, mid-month amendments and auto-populate corrections using data from e-invoices.This could reduce errors and make return filing less burdensome.Mahtani also suggested creating a legislative safe harbour or relaxing credit reversal rules so that honest buyers do not lose legitimate ITC when suppliers fail to deposit tax or file returns.FASTER REFUNDS AND LESS LITIGATIONRefunds are another key area where businesses are looking for changes.Exporters and companies facing inverted duty structures often have working capital stuck in the GST system while they wait for refunds. The proposed changes could make refund verification faster and more automated.Industry is also expecting changes to the inverted-duty refund formula to include input services. This could allow businesses to claim a more complete refund.The Council is also expected to look at reducing the burden of litigation. Rationalising penalties for non-fraud cases and standardising show-cause notices could help businesses avoid lengthy disputes over genuine or procedural lapses.The proposals also include removing powers to arrest under the GST law and raising thresholds for prosecution, as part of a wider push towards decriminalisation.Mahtani said simplifying GST processes would reduce operational friction for taxpayers, including MSMEs.“By further simplifying compliances and processes, the GST Council will stay true to the Prime Minister's proclamation of Good and Simple Tax and be future-ready in this increasingly AI world,” he said.If approved, the changes could mark the next big step in GST 2.0 — moving beyond rate changes to make the tax system easier to follow, unlock working capital and reduce the compliance burden for genuine businesses.- Ends