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The Goods and Services Tax (GST) Council on Thursday decided to further reform the indirect tax system, offering businesses relief on arrest, prosecution and penalty provisions, greater availability of tax credits and quicker refunds and a host of procedural relaxation including easier registration and cancelation under the GST regime.
These measures, which complement the tax rate and slab rationalisation made a year ago, changes the design of GST to make it a more tax-payer friendly and trust-based regime. The process reform seeks to ease day-to-day compliance for businesses.
The Council, chaired by Union Finance Minister Nirmala Sitharaman, approved rule changes covering registration, tax returns, refunds, input tax credit (ITC), dispute resolution, enforcement, exports and movement of goods across states. The reforms seek to make GST administration more system-driven and reduce the need for taxpayers to interact with tax officers.
The move comes a year after the Council moved to a two-rate GST structure. Officials said the reduction in rates has been accompanied by an expansion in the tax base.
Taxable supply grew by more than 25 per cent in FY26, against 13 percent in FY 2024-25, said an official statement.
GST revenue has so far this fiscal grown 11 per cent, with revenue growth during June-August period at 14.7 per cent year-on-year. At the same time, the effective tax rate on domestic supplies has fallen to 13.13 per cent from 14.55 per cent.
Finance Minister Nirmala Sitharaman told reporters at a briefing, “If the rates have come to a settlement last September, reforms of process will also have to come to a conclusion at the earliest.”
An official statement from the finance ministry said businesses deal with registration, returns and refunds much more frequently than they deal with changes in tax rates. The GST system can now match seller and buyer invoices and use network analysis to identify suspicious credit, allowing enforcement to increasingly rely on detection rather than deterrence.
Faster refunds, wider ITC
Refund reform is among the biggest changes announced by the Council. It recommended allowing refund of accumulated ITC on input services and capital goods under the inverted duty structure. An inverted duty structure arises when GST paid on inputs is higher than the tax charged on the final product, resulting in accumulation of unutilised ITC.
Refund of accumulated input tax credit on input services under inverted duty structure will be available on or after November 1,2026. Refund of ITC on plant and machinery, both for exporters and businesses will be available on or after April1, 2027. The refund on plant and machinery will be spread over 60 months.
The refund process will also become largely automated. The time for acknowledgement of a refund claim will fall from 15 days to 10 days. If neither an acknowledgement nor a deficiency memo is issued within 10 days, the claim will be treated as acknowledged.
The system will sanction 90 per cent of eligible refund claims based on risk assessment, without officer intervention. The refund order will be issued within three working days of acknowledgement, compared with seven days currently. Excess balance in the electronic cash ledger will also be refunded automatically.
Jitendra Motwani, Partner, Tax Practice, Trilegal, said the faster refund architecture would be a major boost to business liquidity.
He said the phased extension of inverted-duty refunds to input services from November 1 and plant and machinery from April 1, 2027, would release trapped credit in sectors such as textiles, footwear, pharmaceuticals and manufacturing.
Lower-value notices, lighter enforcement
The Council has proposed a ₹10,000 materiality threshold for GST notices. No notice will be issued where the amount involved is below ₹10,000.
Jigar Doshi, Country Head, Indirect Tax Practice, Ascentium India, said the move would reduce disproportionate compliance and litigation costs.
“Having a materiality threshold for GST notices is a very positive move from both perspectives – the industry and the Government,” Doshi said.
The Council has also recommended removing the power of arrest under GST. The threshold for prosecution will rise from ₹1 crore to ₹5 crore. The general penalty will be reduced from ₹25,000 to ₹10,000.
Motwani said scrapping arrest powers, raising the prosecution threshold and introducing the ₹10,000 floor for notices represented a shift towards more proportionate enforcement.
ITC protection for genuine buyers
The Council has also sought to address a long-standing concern around ITC for genuine buyers.
A committee of officers will examine how to protect a genuine buyer who holds a valid invoice, has received the goods and has paid the supplier in full. The committee will complete its study within three months, after which the matter will be placed before the next GST Council meeting.
The issue relates to cases where a genuine buyer has complied with the requirements but faces denial or reversal of ITC because of a default elsewhere in the supply chain.
Sitharaman said, “Why should an honest payer be put to difficulty and made to wait till such a time everyone in the supply chain comes out clean?”
The committee will submit its report within three months, after which the issue will return to the Council. The decision is targeted for implementation from April 1, 2027.
The Council has also widened ITC availability for certain business expenses. Credit will be available on health and life insurance taken for employees, telecommunications towers and pipelines laid outside factories. ITC will also be available on free samples and stock written off on expiry where the law requires the goods to be destroyed.
In addition, credit will be allowed to flow through certain business-to-business services where a service is bought and sold again in the same line of business. Hotel accommodation of up to ₹7,500 a night booked through an agent, restaurant and catering services and passenger transport are among the examples.
The Council will also examine issues relating to ITC on motor vehicles through an officers’ committee. The committee is expected to examine the matter and the issue will be taken up subsequently.
System-driven registration, return filing, cancellation
GST registration form will be redesigned to guide applicants through only the fields applicable to them and explain the purpose of each document. Several routine amendments, including changes in trade name, directors or partners and additional places of business, will be accepted automatically.
Return filing will also become more system-driven. The government said around 95,000 system-generated notices are issued annually over differences between returns, but recovery against these amounts is only about 0.08 per cent of the amount involved. Many such cases are essentially data-entry errors.
Cancellation of GST registration will be automated in phases, beginning with smaller taxpayers. Around 90 per cent of taxpayers seeking cancellation have never passed on credit above ₹2.5 lakh in any month, reducing the revenue risk from automation, said the statement.
Fewer checks on goods movement
The Council has also sought to reduce physical checks on goods moving across states.
A vehicle will be stopped only on specific intelligence, with prior authorisation from an officer not below the rank of Joint Commissioner. Only the source and destination states will be able to inspect goods in transit. States along the route will not be able to stop the conveyance.
This means a consignment crossing several states would no longer be open to repeated checks at every state border. The government said documents will continue to be matched through the system, but physical inspection will follow information-based risk assessment.
The government is also moving towards a faceless CGST administration, with a framework expected to be developed and put out for public consultation before the next Budget. Implementation is targeted for 2027-28.
Under this, centralised handling of audit, scrutiny, show-cause notices and adjudication is proposed for businesses with multiple CGST registrations.
Export rules eased
The Council has proposed changes to make it easier for Indian businesses to qualify for export benefits.
An Indian company providing services to a foreign client through its own overseas branch will be able to claim export benefits, as per the proposed reform. This will benefit businesses such as analytics firms, design studios and engineering consultancies.
Work carried out in India on goods belonging to a foreign client – including testing, repair, certification, research or processing — will also qualify as export of services even when the goods do not leave India.
Small sellers will also be able to expand through e-commerce platforms without establishing a separate physical place of business in every state.
They will be able to declare an e-commerce operator’s warehouse in another state as their principal place of business, subject to specified conditions and the operator’s consent. More than 90 per cent of sellers supplying through platforms pass on credit below ₹2.5 lakh a month, according to the government.
The Council also sought to ensure that the same delivery service attracts the same tax irrespective of the commercial model used by the e-commerce platform.
The Council did not change GST rates at this meeting. The government said rate matters will now be taken up once a year at a meeting dedicated exclusively to rates.
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