Why Input Tax Credit Reform Is Now Urgent
Input tax credit reform is one of the most awaited demands from Indian businesses. The current rules under the GST regime have become increasingly complex, leading to blocked working capital, refund delays, and rising litigation.
Let’s break down why reforms are needed, what the industry is demanding, and what changes the government might consider.
What Is Input Tax Credit (ITC) Under GST?
- ITC allows businesses to claim credit for the GST paid on purchases or input services
- This credit can be set off against the GST payable on outward supplies
- Intended to avoid “tax on tax” and reduce cascading effect
What’s Going Wrong With ITC?
Here’s what industry experts and trade bodies are flagging:
| Problem Area | Business Impact |
|---|---|
| Mismatch in GSTR-2B & GSTR-3B | Leads to ITC denial even for genuine purchases |
| Blocked credits under Section 17(5) | ITC denied on CSR, construction, and motor vehicles |
| Refund delays on export & inverted duty | Cash flow strain for MSMEs and exporters |
| Time limits under Section 16(4) | Late invoices result in permanent ITC loss |
| Dependency on vendor compliance | Buyer suffers if supplier fails to file GSTR-1 properly |
What the Industry Is Asking For
The following reforms are being widely demanded across sectors:
- Automatic ITC system: Based on invoice upload without dependence on GSTR-2B
- Relaxation of Section 17(5): Especially for logistics, infrastructure, and R&D sectors
- Faster refund timelines: Particularly for exports and inverted duty structures
- Wider time window for ITC claims: To reduce permanent credit losses
- Government portal simplification: User-friendly tools to track ITC reconciliation
Expert Insight: ITC Reform Is Linked to Ease of Doing Business
“Without ITC fluidity, GST becomes a tax on capital, not consumption. This distorts working capital and erodes trust in the system,” says CA Ramesh Menon, Indirect Tax Consultant.
Many MSMEs, especially exporters, are spending more time on GST compliance than growing their business.
Legal Backing: Why Reform Is Also a Legal Need
- Gujarat HC in M/s CHUNILAL SHIVLAL vs Union of India held that legitimate ITC can’t be denied due to supplier default
- Multiple writ petitions are pending on blocked credits and refund delays, showing systemic stress
Government’s Stand So Far
- Set up a Law Committee to review ITC provisions
- Considered auto-refund pilots in select states
- Issued clarifications via Circulars (like Circular No. 183/15/2022-GST)
- Tightened compliance for fraud cases but not eased genuine claims
Still, large-scale reform is pending.
What Businesses Can Do Now
- Regularly reconcile GSTR-2B vs Purchase Register
- File ITC claims within the annual due dates
- Maintain vendor follow-ups and documentation
- Use Efiletax tools for GSTR-3B & 2B tracking
- Seek professional advice for ITC disputes and refunds
Summary
Input tax credit reform is crucial to unlock GST refunds, cut compliance stress, and boost MSME cash flow. Industry seeks auto-ITC, wider time limits, and fewer blocked credits.
FAQs
Q1. Can I claim ITC if my supplier didn’t file GSTR-1?
No. As per Rule 36(4), your ITC is only allowed if it reflects in your GSTR-2B, which depends on your supplier filing GSTR-1.
Q2. What is the time limit to claim ITC?
You must claim ITC by 30th November of the next financial year or the date of filing the annual return, whichever is earlier.
Q3. Is ITC available on CSR expenses?
As per Section 17(5), ITC on CSR activities is generally blocked, but a few High Court rulings have differed. Litigation is ongoing.
Final Words
The input tax credit reform debate is not just a technical tax issue—it’s a working capital crisis for Indian businesses. While the government aims to curb fraud, it’s time to balance that with trust-based credit for compliant taxpayers.