When the Goods and Services Tax (GST) was implemented on July 1, 2017, one of its central promises was to eliminate tax cascading and allow seamless flow of input tax credit (ITC) across the value chain.
Nearly a decade later, GST has largely succeeded in replacing multiple indirect taxes with a unified system. But one part of the reform continues to generate friction for businesses: input tax credit.
Today, ITC has become one of the biggest sources of litigation, working-capital blockage and compliance anxiety under GST. What was designed as a pass-through mechanism has evolved into a compliance-driven process where access to credit depends not only on a company’s own actions, but also on supplier behaviour, invoice matching and portal-based validations.
From seamless credit to conditional credit
Experts say GST succeeded in reducing embedded taxation but the architecture of claiming credit has changed significantly.
Swaroop Repaka, head of product at ClearTax, told Business Standard that the original design worked on a different principle. “The original promise of input tax credit (ITC) was simple and powerful: kill the cascading of tax and let credit flow seamlessly across the chain. On the first count, GST has genuinely delivered; the embedded-tax problem of the old VAT + service tax + excise era is largely gone.”
However, he said, the ITC mechanism has quietly changed character. “We’ve moved from a self-assessed, trust-based model to a verification-based, supplier-dependent one,” he said.
Over time, requirements such as invoice matching, GSTR-2B reconciliation, restrictions under Rule 36(4), Section 16(2)(aa), and now the Invoice Management System (IMS) have made credit eligibility more tightly linked to compliance data.
Nitin Vijaivergia, partner at Price Waterhouse & Co LLP, told Business Standard, “GST was envisioned as a seamless credit-based tax, eliminating cascading and taxing only value addition. While it has largely delivered on these objectives, the architecture of input tax credit has evolved from a seamless tax mechanism into a conditional entitlement.”
“Today, input tax credit is available not merely because tax has been paid, but only when every link in the compliance chain performs flawlessly,” he said.
Why input tax credit has become a business risk
For businesses, delayed or denied credit directly affects cash flows. Under the current system, companies may have purchased goods, paid suppliers and fulfilled their obligations, but still face delays if supplier filings do not reflect correctly.
Maulik Manakiwala, partner – indirect tax, tax & regulatory advisory at BDO India, said: “One of the key challenges is the dependence on GSTR-2B for availing ITC. In cases where suppliers fail to furnish their GSTR-1 within the prescribed time, the corresponding ITC does not reflect in the recipient’s GSTR-2B.”
This creates “blockage of working capital and delays in credit utilisation”, he told Business Standard.
Experts say the debate has gradually shifted from availability of credit to certainty of credit — a distinction that increasingly influences business decisions and investment planning. Ashish Kumar, head of compliance at supply chain finance platform Vayana, told Business Standard, “Bigger companies have folded this straight into their vendor scorecards. And it’s pretty common now for buyers to hold back the GST portion of a payment until the credit actually shows up in their GSTR-2B — basically tying payment to compliance.”
Working-capital pressure and rising disputes
Businesses say supplier defaults are now among the biggest reasons for credit loss or delay.
Manakiwala said, “Companies today often lose, delay, or reverse input tax credit (ITC) mainly due to supplier not filing GST returns or paying tax; invoice mismatch or non-reflection in GSTR 2B; missing time limits or delayed claims; and inverted duty structure (higher tax on inputs than outputs).”
Sectors with long supply chains or refund dependence are particularly exposed.
Vijaivergia said that supplier-side compliance defaults frequently disrupt the flow of input tax credit. He further said inverted duty structures continue creating working-capital stress in sectors such as FMCG, textiles, footwear, fertilisers and renewable energy.
Ranjeet Mahtani, partner at tax and regulatory advisory firm Dhruva Advisors, told Business Standard that construction remains particularly vulnerable because project revenues arrive over longer cycles while input costs arise upfront.
What businesses want from GST’s next phase
Tax experts argue that the next stage of GST reform may not be about introducing new rules but reducing procedural friction.
Businesses want greater certainty that genuine credit will not be denied because of supplier defaults outside their control. Simpler reconciliation processes, clearer buyer protections, faster refunds and easier correction mechanisms remain among the key demands.
Repaka said the system has been optimised for revenue protection and the next phase should focus on restoring ease of doing business.
Source: Business Standard
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