NEW DELHI: The change in input tax credit mechanism introduced by government has helped generate as much as 2% cash for certain manufacturing sectors, helping lower cost, which has not been passed on to consumers. In the services sector too, tax experts said, businesses have gained due to refunds from ITC on rentals, which can constitute up to 10-15% of the cost for IT and consulting firms.
In Sept 2025, the rate rationalisation had reduced several mass consumption items, such as all food products, into the 5% slab from 12% or 18% earlier. The GST Council had also allowed faster provisional refunds for inverted duty cases. At last month’s meeting, the Council also allowed refunds on GST paid on input services, giving businesses extra cash flow and reducing overall costs by freeing up working capital.
“Whether the benefit reaches consumers is only one part of the story. The broader significance of the change lies in reducing the tax and working-capital burden on Indian manufacturing. As India expands its FTA network and integrates more deeply with global value chains, correcting inverted duty structures and rationalising Customs tariffs will become increasingly important to keeping domestic industry competitive. The direction of reform is therefore moving towards a common objective: lower tax friction, unlock working capital and give Indian businesses greater room to invest, scale and compete. In the end, the success of these reforms will depend not merely on how much credit is released, but on how industry puts that money to work and how much value ultimately flows back to the consumer,” said Saurabh Agarwal, Tax Partner at EY India.
The calculation done by experts showed the impact varies across sectors (see graphic). Unlike last year, when there was a nudge from government to pass on the benefits to consumers and spur demand, this time there is no similar push. Businesses have pocketed the gain and reversed the benefit for consumers that flowed from last year’s tax cuts, citing higher costs. “If you look at the prices, several products are back at last year’s level, despite tax rate falling from 28% to 18% or from 12% or 18% to 5%. Tax as a part of the overall price for consumers are very low now,” said another consultant.
Source: The Times of India
