Apart from structural imperfections of India’s Goods and Services Tax (GST), central to which is exclusion of significant sections of the economy from the tax’s ambit right, compliance-related difficulties and administrative issues are also to blame for its below-potential performance, experts feel. A lack of preparedness on the part of the industry, especially the smaller units, has also come in the way of smooth implementation of the consumption tax.
Making the case for the GST reset, the Centre has recently outlined a slew of steps that have been taken over the years to ease compliance, and improve administrative systems. The national average of GST compliance stood at 94.3% in FY25, it said, adding that nearly 85% of input tax credit (ITC) claims are now processed within the statutory 60-day limit. Also, the average time for grievance disposal has been reduced to 9 days.
Pain points in compliance and refunds
However, problem areas remain. “For compliance simplification, issues like multiplicity of audits and assessments need to be addressed. Investigations are being carried out on corporates with registrations in multiple states. This should be reduced. Ideally, a single PAN-based registrations should be audited by either the Centre or state,” said Rajiv Memani, president, Confederation of Indian Industry.
A long-standing grievance of the industry is with regard to payment of GST under the Reverse Charge Mechanism (RCM). Such tax obligations continue to be discharged in cash, even when taxpayers have accumulated input tax credits. Allowing RCM payments through the credit ledger would ease working capital pressures, industry executives say.
Though return filings (forms and processes) on the official GSTN portal are being eased a lot, these can be simplified further. Similarly, Memani notes, refunds and audits need to be further automated to save compliance costs. “In case of businesses having pan-India operations, filing GST returns for all the states entails as many usernames and passwords to be used. A single log-in and password should be designed to file GSTreturns,” Rahul Renavikar, managing director at Acuris Advisors, said. “Overall, reforms aimed at greater automation, simplification, and rationalisation of compliance requirements would make GST more business-friendly,” Memani added.
Experts also note that while GST has helped expand the tax base to an extent, frequent rule changes, multiple return forms, portal downtime near deadlines, and lack of clarity in departmental notices make compliance time-consuming and unpredictable for businesses. “Refunds are faster these days, especially for exporters, but practical issues like portal errors, repeated document submissions, still cause delays in some cases, leaving small firms with funds stuck for months,” Sandeep Sehgal, partner-tax at AKM Global said.
During a conclave with senior officers of Central Board of Indirect Taxes and Customs in June, Union finance minister Nirmala Sitharaman asked the tax zones to prepare an action plan to improve GST registration, processing of refunds, and handling of taxpayers’ grievances. At the same time, she stressed the need for preventing tax evasion and wrongful Input Tax Credits (ITC) claims.
As GST rate cuts are in the anvil as part of the reforms being undertaken , the industry is grappling with deferment of purchases by a section of consumers. While some state governments have asked for redeployment of the anti-profiteering provision to ensure that tax reliefs reach the end consumers, businesses are concerned over the “uncertainty among distribution channels on ITC” and inverted duty structures, that may reappear in the reformed GST, with fewer tax slabs.
GST refunds of 80-90% are granted on an adhoc basis, and the remaining amount is paid only after audits/assessments, which often are unduly delayed. In the current circumstances, when many businesses operate on wafer thin margins, and amid an export slump that may aggravate with the hefty US tariffs on Indian goods, full and timely refunds are needed to o release blocked working capital, Renavikar said.
There is also a view that filing of annual GST returns should be completely done away with now that monthly/quarterly returns are all digitised and the GSTN is in the process of rolling out pre-filled returns in the near future.
Firms across sectors like fast-moving consumer goods, auto, pharmaceuticals, medical devices, textiles, fertilisers and chemicals, have flagged the issue of accumulated ITC. The common fear is that if GST on finished goods or services are slashed without corresponding alignment of input taxes, the resulting inversion would block credits, increase compliance burdens, and in some cases, raise costs instead of reducing them. This will defeat the purpose of GST rationalisation, and even the short-term objective of boosting consumption during the festive season that has just started.
The GST regime has called for high digitisation with the intent to achieve faceless assessments. But in the initial years of the tax, there existed a disconnect of the new system with non-digital methods of accounting and return filing, leading to a flurry of notices being issued to taxpayers after every return-filing deadline.
The proposal to introduce pre-filled returns may help reduce manual intervention and thereby disputes. Similarly, refunds could be expedited for exporters and units suffering from inverted duty.
Industry bracing up, buyer queries down
Companies may need to factor in the incremental cost while arriving at the revised MRP in the new GST regime. The uncertainty over the final price for the finished products has already prompted auto and consumer durable dealers to add inventory cautiously for the festive season.
Auto companies it is learnt is discouraging dealers from stocking models that may attract higher cess. Mahindra & Mahindra, for instance, has discontinued internal combustion vehicles (ICE) vehicles above Rs 15 lakh to dealers due to a likely loss of compensation cess on these models, sources said. Concerns are also growing among auto, durable as well as FMCG dealers and distributors on how current stock in trade will be treated.
Pratik Jain, partner (indirect tax) at PwC India warns the rate reduction, particularly from 12% to 5% may result in new inverted duty structures for many products as most of the inputs and services would continue to attract a higher rate of 18%.
Consumer durable retailers in Maharashtra, Goa, Karnataka, currently celebrating Ganesh Chathurthi, and Kerala, which will celebrate Onam next week, indicate that buyer queries are down by at least 50-60% as most consumers are anticipating a drop in prices around Dusshera-Diwali.
The government is learnt to have proposed to retain 5% GST rate for garments with selling price at or below Rs 25,00/piece, while hiking the rate from 12% to 18% for those priced higher.
“The only way the proposed GST reforms will be beneficial for the apparel industry is if the entire textile value chain is shifted to the 5% tax slab,” Rahul Mehta, chief mentor, Clothing Manufacturers Association of India, said.
According to Hiten Dedhia, head of finance at Oyster Renewable Energy, zero-rating cis crucial as it allows recovery of input taxes, ensuring smoother financial operations. “Exemptions, though providing tax relief, often block credits, which can increase costs, Dedhia said. “From a project developer’s standpoint, inverted duty structures complicate GSTcompliance and inflate the effective tax burden on key inputs, affecting project viability,” he added.
Prashant Mathur, CEO, Saatvik Green Energy, said the government’s recent emphasis on faster refunds and grievance redressal are encouraging. “This can play a vital role in supporting industry liquidity and growth. Ultimately, the success of reforms will depend on a balanced approach that combines rate rationalisation with transparent, technology-driven refunds, apart from a time-bound registration process, especially for small businesses and start-ups,” Mathur said.
Tomorrow: Concerns over revenue, and how they are shared.