Vishleshan for Regulatory Exams, 18th August 2025: GST Reforms

Want to get ready for the UPSC, RBI, SEBI, or NABARD exam? If yes, you have to stay updated about important economic and regulatory updates. In today’s edition of Vishleshan, we’ll discuss the GST Reforms. These issues are highly relevant for all the upcoming competitive exams mentioned above. Keep reading to stay ahead with a clear understanding of these current updates.

GST Reforms: Some Pain Points

Context: There should be no restrictions on taking input tax credit (ITC), on the essential principle that once tax is paid, it should either be refunded or go into the ITC chain. ITC of the integrated GST paid through challan in the Customs portal should automatically flow into the GST electronic credit ledger, without any need for reassessment of the bill of entry.

Link to the Article: Business Standard

Prime Minister Narendra Modi has hinted at a new generation of Goods and Services Tax (GST) reforms, promising to make daily-use articles cheaper and simplify regulations for small businesses. This announcement has raised expectations for the rationalization of tax rates and the resolution of long-standing issues within the GST regime. The proposed reforms and suggestions from experts focus on streamlining the system, reducing litigation, and improving the efficiency of processes like Input Tax Credit (ITC).

Goods and Services Tax (GST):

• Meaning: GST is a destination-based tax on consumption of goods and services. It is levied at all stages of the supply chain, from manufacturing to final consumption, with a mechanism for offsetting prior-stage taxes. The core idea is to tax only the value addition at each stage and to ensure that the final tax burden is borne by the end consumer. By subsuming a large number of central and state indirect taxes, GST aims to create a “common national market” and reduce the cascading effect of taxes.
• Constitutional Basis: The introduction of GST required amending the Constitution. The Constitution (101^st Amendment) Act, 2016, was enacted to facilitate the introduction of GST. This amendment gave both the Parliament and state legislatures the power to make laws for levying GST. Article 279A was inserted to establish the GST Council, a joint forum of the Centre and states responsible for making recommendations on all GST-related matters.
• Types of Transactions: The type of GST applied depends on whether the transaction is intra-state or inter-state.
  • Intra-State Transactions: These occur within the same state or Union Territory. They are subject to both CGST and SGST/UTGST.
  • Inter-State Transactions: These occur between different states or Union Territories. They are subject to IGST.
• GST Structures and Tax Sharing:
  • CGST (Central Goods and Services Tax): Levied by the Central Government on intra-state supplies. The revenue goes to the central government.
  • SGST (State Goods and Services Tax): Levied by the respective state government on intra-state supplies. The revenue goes to the state government.
  • IGST (Integrated Goods and Services Tax): Levied and collected by the Central Government on inter-state supplies and imports. The revenue is later apportioned between the Union and the States based on the recommendations of the GST Council.
  • UTGST (Union Territory Goods and Services Tax): Levied on intra-union territory transactions and functions similarly to SGST.
• Tax Slabs and Inconsistent Rates:
  • Current Slabs: The current GST rates are divided into multiple slabs: 0%, 5%, 12%, 18%, and 28%.
  • Inconsistent Slabs Issue: The existence of multiple slabs has been a major problem, as it leads to classification errors for businesses, particularly for MSMEs and retailers. It creates ambiguity and makes it difficult for businesses to determine the correct rate, which can result in fines and legal issues. The complexity also leads to an accumulation of unused input tax credit, as input and output goods may fall under different slabs, thereby affecting the cash flow of small businesses.

Analysis of the Article: Decoding the Next-Generation GST Reforms

The article highlights the government’s intention to push for “next generation GST reforms” and outlines several key suggestions from experts to improve the current GST regime.

• Prime Minister’s Promise and Expectations: Prime Minister Narendra Modi’s Independence Day speech promised a “Diwali gift” of next-generation GST reforms, aiming to make “daily-use articles” cheaper and increase facilities for small businesses and entrepreneurs. This has created expectations of rate rationalisation and reduction on everyday consumption goods and services.
• Suggestions for Reform:
  • Input Tax Credit (ITC): It is a key feature of the Goods and Services Tax (GST) regime that helps eliminate the cascading effect of taxes, or “tax on tax”. It is a mechanism that allows a registered business to claim credit for the GST paid on its purchases (inward supplies) of goods or services, which can then be used to offset the tax it owes on its sales (outward supplies). The net tax liability, which is the tax on sales minus the tax paid on purchases, is then paid to the government.

Experts suggest that there should be no restrictions on taking ITC based on the principle that “once tax is paid, it should either be refunded or go into the ITC chain”. Specific recommendations include:

• Removing the time limit for taking ITC.
• Not denying ITC because the recipient has not paid the supplier.
• Allowing ITC on motor vehicles and for the construction of immovable property used in business.
• Allowing automatic flow of IGST paid via challan on the Customs portal into the GST electronic credit ledger.
• Dispute Resolution and Litigation:
  • Establish an independent body for advance rulings.
  • Prioritize identifying and addressing major issues that cause litigation.
  • Get GST tribunals functioning soon.
  • Use artificial intelligence to scan pending litigations for similar issues to facilitate quick resolution.
• Simplifying Procedures:
  • The government should avoid “frivolous show-cause notices and pointless litigation”.
  • The breakdown of central and state GST should be done at the back end, not by the taxpayer.

In conclusion, the government’s promise of next-generation GST reforms is expected to lead to rate rationalization and a more streamlined tax regime. The core reform areas include simplifying the Input Tax Credit process, improving dispute resolution mechanisms with the help of technology, and reducing the burden of compliance on taxpayers. These changes are crucial for enhancing the efficiency of the GST system and promoting economic growth, especially for small businesses.

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