GST Structural Reforms 2.0

The Structural Reforms 2.0 have aimed at making significant relaxations in relation to various processes, refunds, exports, with a significant change in terms of removal of arrest powers from GST officers.

While the broad theme was to undertake structural reform, at the same time, significant boost has been provided to exporters and inverted tax structure sectors by providing refund for capital goods and input services, unlocking significant capital which can be optimally utilized for further expansion. ITC reforms in the form of employee related expenses including insurance, catering, as also business expenses like samples, expired stock destruction further supports Government’s efforts towards achieving complete value-added taxation.

Unblocking of Input Tax Credit:

The GST Council has announced rationalization of blocked credit by amending Section 17(5) of the Central Goods and Service Tax Act, 2017 (the “CGST Act”) and will be implemented in a staggered manner. 

The proposed amendments unlock the blocked ITC, the reform will improve working capital liquidity, free up capital for expansion and fresh investment, and strengthen the competitiveness of the sectors. The council proposes to allow ITC in relation to business-related expenses, allowing input tax credit to flow seamlessly through the supply chain without leakage or distortion. The proposed amendments rationalize/ unblock ITC in relation to the following:

• group health and life insurance for employees;

• outdoor catering; goods destroyed, written off after expiry of shelf life;

• free samples;

• telecommunication towers, pipelines laid outside factory premises.

While the step is sector agnostic change, however, the above announcement does not clarify the GST position involving recovery from employees. Challenges in relation to specific rate notification like catering continues, ITC eligibility related to the goods used and destroyed during the manufacturing process, and eligibility to avail ITC qua promotional items.

Separate committee to examine implementation of ITC for bona fide purchases from non-existence suppliers / tax paid availing fraudulent ITC in terms of Sec 16(2)(c) of the CGST Act.

Refund reforms - Unlock the capital:

Refund of accumulated ITC of input services and capital goods in phased manner over 60 months is in line with the discretionary powers of the GST Council to set the policy as discussed in VKC Footsteps by Apex Court.

Accumulated ITC on capital goods is now proposed to be refunded in cases of zero-rated supplies (Rule 89(4)) and under the inverted duty structure (Rule 89(5)), with IDS refunds additionally covering ITC refunds on input services.

However, this prospective change will be implemented for future acquisition after 1.11.2026 for input services and 1.4.2027 for capital goods. This is not addressing for the past accumulation.

The restriction under Rule 89(4)(C) of the CGST Rules, 2017, capping the maximum turnover of zero-rated supply of goods at 1.5 times the value of like goods domestically supplied, is proposed to be removed, a significant relief for exporters. However, the aspect of refund being granted based on FOB valuation continues for such exporters.

Expanded scope of Zero-Rated Supply:

Reforms for Indian service providers:

Branch Exports: Indian service provides can claim export benefits on services supplied to/through their foreign offices/branches.  Currently, in terms of specific definition, supplies through foreign branch were not qualifying as export of services, creating anomalies for IT sector.

Testing / R&D services: The place of supply for services involving goods physically made available by the recipient of services to the supplier will be determined under the default provision of Section 13(2) of the IGST Act i.e., the location of the recipient. Accordingly, testing, repair, certification, and R&D services performed in India on foreign-owned goods shall qualify as export of services, as the place of supply would be the recipient’s location rather than the location where the services are performed.

However, companies availing testing and R&D services from outside India will need to pay under reverse charge.

Zero rated for non-physical export:

Goods delivered at FTWZ: Zero rated benefit proposed for supplies made by Indian manufacturers to overseas customers where the goods are delivered to the overseas customer in a Free Trade Warehousing Zone (FTWZ) for warehousing or further processing.  This will help the companies procure goods from India as per Defence Offset Contract and 'Make in India' localisation requirements.

We need to see the fine print as certain aspects remain open, including documentation requirements, procedures for goods entering FTWZs, and the related GST/customs compliance obligations.

Faceless assessment and Arrest:

In line with the GST Council’s resolution to facilitate ease of doing business and strengthening ‘trust-based tax regime’, arrest powers under Section 69 of the CGST Act have been completely withdrawn removing a very draconian measure and providing considerable relief to taxpayers being subject to investigation and scrutiny. Further, provisions in relation to prosecution and issuance of show cause notice have been rationalized, adding various fetters on initiation of proceedings and imposition of penalties which is also in line with the direction of various High Courts.

However, it is to be noted that only the monetary threshold has been increased for institution of prosecution and certain concessions have been made in relation to offences. Thus, punitive measures such as penalty and imprisonment for offences enlisted would continue with respect to serious cases of fraud and evasion of tax, under Section 132 of the CGST Act. The Central government has introduced faceless assessment similar to Income tax and customs for taxpayers under central jurisdiction.

Significant automation reforms:

It is proposed to significantly reform the processes relating to return mismatch, including credit note matching and acceptance, IMS, providing legal backing to electronic credit and reversal and RCM statements, provide for automatic amendment and cancellation of registration as also faster refunds, clarifications relating to interest on pre-deposit and ISD. This is a significant structural reform, aimed at reducing taxpayer interaction with GST officials and moving towards automation driven systems. While some of the changes will be implemented on staggered basis, it enforces confidence for businesses towards achieving the objective of making GST a good and simple tax.   

Bunching of SCNs to be validated:

Bunching of SCNs for multiple financial years is sought to be taken care by amending the provisions. This may put to rest the litigation in relation to technical point of bunching, wherein Courts have so far offered differing views on its validity.  

Permanent transfer of intellectual property rights as services: 

Temporary transfer of intellectual property rights qualified as supply of services. However, there was lack of clarity with regard to permanent transfer of IP rights, as to whether which would otherwise qualify as goods. Earlier, there was ambiguity with respect to both exports and imports as well as local supplies (whether IGST or CGST+SGST is payable), since intangibles do not require any physical movement. 

The amendment in Schedule II to classify it as supply of services brings clarity for domestic supplies and import and export alike. 

Having said that, for transactions between related parties, the valuation aspect will still play an important role for determining the tax liability. 

E-commerce  – Simplification and rationalisation of GST framework:

The Council has proposed a simplified mechanism for GST registration of small suppliers making B2C supplies of goods through ECOs in States/UTs where they do not have a physical presence. Such suppliers may declare the ECO’s warehouse in the relevant State/UT as their Principal Place of Business, subject to prescribed conditions, including an ITC threshold of ₹2.5 lakh per month. Registration is proposed to be granted automatically through the system. This will enable small sellers to expand their operations across States without establishing a physical place of business in each State. However, this is dependent on contractual arrangements between the seller and the E-com marketplace.

Further, delivery services supplied through ECOs by persons not liable for registration are proposed to be brought under Section 9(5) of the CGST Act,  the GST rate has been reduced to 5% without ITC. This will shift the GST compliance and payment responsibility from eligible small delivery service providers to the ECO. ECO need to revaluate the arrangements for local delivery.

The exemption for GTA services supplied to unregistered persons is also proposed to be restricted where the goods are supplied/ordered through an ECO.

Rationalisation of E-Way Bill enforcement framework:

The GST Council has come up with significant rationalisation in the e-way bill and goods-in-transit enforcement framework.

1.       Inspection, detention or seizure can only happen at the dispatching/origin state or the destination state.  Fine print needs to be seen for bill-to ship-to arrangement.

2.       However, the exceptional interception based on specific intelligence and lack of documentation continues.

3.       Further, confiscation provisions under Section 130 would no longer apply to goods or conveyances in transit.

Aimed at ensuring smoother movement of goods and conveyances by curbing arbitrary interceptions and greater procedural safeguards, these measures come as big relief for businesses in reducing logistical disruptions and delays and enhanced efficiency in supply chain operations. This helps in bringing the certainty in inter-state goods movement.

Clarifications regarding rates of goods and services:

Following the rate rationalization introduced through GST 2.0, the GST Council has provided further clarifications for the rates of various goods and services clearing up past ambiguities. Notable clarifications pertain to passenger transport services and renting of motor vehicles. Option to pay GST at the rate of 5% has been extended to suppliers utilizing electric vehicles where cost of battery is included in consideration. Further clarification is anticipated in relation to motor vehicle leasing transactions and particularly on recoveries made by lessor from the lessee. 

Benefit of availing restricted ITC will also be extended to resellers of hospitality related services such as restaurant/outdoor catering, hotel accommodation (charging per day rate above Rs. 7,500) where concessional rate is adopted. This would provide considerable relief to resellers of said services who previously were restricted from availing of ITC.

LKS has issued updates on the key recommendations of the 57th GST Council Meeting for the following sectors:

• Textile Sector – Click here to access the update.

• Pharmaceutical Sector – Click here to access the update.

• FMCG Sector – Click here to access the update.

(Note: The above updates and News are based on PIB Release and announcements made post Council meeting. The same is subject to appropriate amendments / notification to be implemented in due course.)