NEW DELHI: The second-generation Goods and Services Tax (GST) reforms, launched a year ago with sweeping rate cuts across a wide range of goods and taxpayers, are now set to enter a broader phase focused on overhauling the tax system’s processes and administration. The GST Council, at its 57th meeting on October 7, is expected to consider a package of measures aimed at speeding up and widening access to tax refunds and input-tax credits, simplifying compliance through greater automation and system-driven enforcement, and bringing more small businesses into the organised supply chain.
If approved, the proposals could lower project costs, strengthen export competitiveness and provide a boost to investment. A key element of the comprehensive process reforms will be the progressive decriminalisation of GST offences, alongside a proposed plan to remove arrest provisions from the GST laws altogether.
Following the Council’s approval, the proposals are likely to be rolled out in phases through 2027.
The GST 2.0 reforms were unveiled by the Council in September 2025, following an announcement by Prime Minister Narendra Modi in his Independence Day speech on August 15.
The multi-rate, complex structure of the principal indirect tax was replaced by a relatively simpler two-rate structure of 5% and 18%, with an additional special rate of 40% for demerit and sin goods.
“Having touched the rates and seen their stabilisation over the last 12 months, we hope that, with the system and processes now being simplified and reformed, the entire next-generation GST will see stability over the next five years or more,” a senior government official said. The idea is to embrace a trust-based system similar to the one put in place for direct taxes, the official added.
According to the agenda for the upcoming meeting, the Council may allow refunds of taxes paid on a wider range of services, as well as on plant and machinery, in addition to the tax credit currently available for raw materials. Recovery of tax on equipment will be allowed over five years, matching the asset’s useful life. The move will allow businesses to claim more credits with fewer conditions and is expected to bolster working capital and cut upfront project costs.
The Council is also expected to introduce an optional scheme for small businesses with annual turnover up to Rs 5 crore that sell exclusively to GST-unregistered consumers. Such businesses would be allowed to file a single GST return annually and pay GST every quarter. This would go beyond the existing provision allowing quarterly returns with monthly tax payments. Since their customers cannot claim input-tax credit (ITC), there is less need for frequent return filing.
Under the proposed changes, refund claims will increasingly rely on government-held data rather than manually submitted documents, with acknowledgements issued within 10 days. If no action is taken within that period, the claim will be deemed to have been acknowledged, sources said. Eligible exporters and taxpayers affected by inverted duty structures could receive 90% of eligible refunds based on risk assessment, improving cash flows. Balances lying in the electronic cash ledger could also be refunded automatically. Show-cause notices will be restricted to cases where the tax demand exceeds Rs 10,000.
Exporters claiming duty drawback will also be allowed to claim refunds, and the cap linked to domestic prices will be removed. Interest on delayed refunds will accrue from the date on which the refund is withheld. The `1,000 minimum refund threshold will be calculated across all tax heads combined, including Central GST and State GST, allowing businesses to recover smaller amounts that were previously written off.
According to the proposals, ITC rules will also be widened to benefit businesses across sectors. Genuine buyers will retain ITC even if a supplier further up the chain defaults, unless they were party to fraud. ITC eligibility will be expanded to health and life insurance, vehicles with up to 13 seats, telecom towers, pipelines, samples and expired goods. Credit will also be allowed on services taxed at 5%, including hotel
Several anomalies will also be addressed. Overseas branches, for instance, will no longer block export status, allowing Indian service exporters to quote prices without embedded domestic tax.
Eligible businesses can currently obtain GST registration within three working days without officer intervention. This route already accounts for 61% of registrations. For applicants who do not qualify for the fast-track route, the system will automatically populate information already available with the government and indicate upfront what additional documents or information need to be submitted.
Under Rule 14A, taxpayers opting for the fast-track route and not intending to claim more than `2.5 lakh of input-tax credit a month can obtain registration automatically within three working days, without manual approval.
Procedural suspensions could also be lifted automatically once compliance is completed within a month, while cancelled registrations could be restored automatically after rectifying the underlying compliance lapse. This would reduce waiting times and the need for professional follow-up.
On return filing, invoice-level matching and corrections through sales statements will keep seller filings and buyers’ input-tax credits aligned, potentially reducing routine mismatches significantly. More than 95,000 notices are currently generated every year over differences in returns, the sources pointed out.
GST enforcement is also shifting from criminal prosecution towards proportionate civil penalties, with arrest provisions proposed to be removed as invoice matching and data systems improve fraud detection. Prosecution would remain for only serious cases, with the threshold raised from `1 crore to `5 crore. Nine offences would be dropped, 24 softened and 11 retained, while minimum sentences and some penalties would be reduced. The proposals for de-criminalisation and shift to mere civil consequences for violations and offences will require amendments to the GST Acts, which may be carried out over the next few weeks for their rollout in early 2027.
“The objective is to simplify the process, reduce the burden, and decriminalise wherever possible. The larger principle is to make compliance simpler and fairer,” another official said.
GST rates, meanwhile, will remain unchanged, preserving the two-rate structure introduced last year and providing businesses with greater certainty over pricing, investment and compliance. The focus will instead be on clarifications, exemptions and classification issues across goods and services, including electric vehicles, research, warehousing, co-lending and bullion.
Outside the GST Council framework, the Centre is working on a centralised system for assessment, adjudication and related proceedings, with the longer-term goal of creating a faceless system for taxpayers registered with it. Of roughly 6.5-6.6 million registrations, around 6-6.2 million have a single central registration, while 0.3-0.35 million have multiple registrations across locations. Of these, around 80,000 have registrations spanning multiple states.
The 0.3-0.35 million taxpayers with multiple registrations will also be brought under the centralised system, although the government is still working out how to allocate cases across jurisdictions without creating concentration or operational challenges. “In terms of experience, process reforms would be far more impactful,” the second official said.
Source: The Financial Express
