GST 2.0 Process Reforms: Council to Consider Unlocking Input Tax Credit, Faster Refunds and Export Relief
The GST Council will consider a wide set of process reforms at its meeting on Wednesday (7 October 2026). These would complete the "GST 2.0" makeover that began with the rate cuts of 22 September 2025.
Unlocking credit: Tax paid on plant and machinery and on input services, which businesses could not recover, may be refunded in monthly instalments over five years. Credit may also be allowed on several items now blocked under Section 17(5) of the CGST Act, such as employee health and life insurance, outdoor catering, telecom towers, pipelines outside factories, and vehicles seating up to 13 persons.
Inverted duty relief: Many goods in the 5% slab (food, medicines, textiles, electric vehicles) pay a higher tax on inputs than on the final product. Thousands of crores of credit are stuck as a result, and the reforms aim to release it.
Protecting genuine buyers: When a supplier up the chain fails to pay tax, a genuine buyer may be allowed to keep its credit, and recovery would be made from the defaulting supplier.
Export relief: Supplies by Indian IT/ITeS firms to their own overseas branch offices may be treated as exports. Goods sold to foreign buyers but delivered in a Special Economic Zone (SEZ) and paid for in foreign currency may also count as exports.
Less small-value litigation and easier registration: There would be no show-cause notice where the amount is below ₹10,000. Small businesses (turnover up to ₹5 crore, selling only to unregistered customers) could file annual returns with quarterly payments. Automated registrations would be granted within three working days.
Input Tax Credit (ITC) Mechanism Under GST
Input Tax Credit (ITC) is the heart of GST. When a business buys raw materials or services, it pays GST on them. When it sells its own product, it subtracts the GST already paid on purchases from the GST it owes on sales. So tax is paid only on the value added at each step, and "tax on tax" is avoided.
Most of the proposals are about ITC. They would open blocked credit under Section 17(5), refund credit on plant and machinery over five years, and protect genuine buyers. Each step frees working capital that businesses could reinvest.
Inverted Duty Structure Under GST
An inverted duty structure is a situation where the tax on what a business buys (its inputs) is higher than the tax on what it sells (its output). For example, a fabric maker may pay 18% GST on dyes and chemicals but charge only 5% GST on the fabric it sells. Because it collects less tax than it has already paid, unused credit keeps piling up in its account. This piled-up credit is money that is stuck with the government.
Many goods in the 5% slab now face inversion, and the stuck credit runs into thousands of crores. The Council's package aims to turn this locked-up money into usable cash, which experts compare to a capital spending push. It would also refund credit on plant and machinery over five years, an item the current inversion refund formula leaves out.
Zero-Rated Supplies Under GST: Exports and SEZ Supplies
A zero-rated supply is a sale on which the final GST burden is zero, and the seller can still recover all the GST it paid on its inputs. Under India's GST, only two kinds of supply are zero-rated: exports of goods or services, and supplies to Special Economic Zones (SEZs). The idea is simple: India should export goods and services, not taxes.
The Council is considering treating supplies by Indian IT firms to their own overseas branches as exports. That would relax the "distinct person" condition and give these firms zero-rated status and input credit. It may also treat goods sold to foreign buyers but delivered in an SEZ, with payment in foreign currency, as exports, and align GST export payment rules with RBI rules.
- GST Council meeting to consider the package: Wednesday, 7 October 2026
- Proposed refund of tax on plant and machinery and input services: monthly instalments over five years
- Proposed widening of credit under Section 17(5): employee health and life insurance, outdoor catering, telecom towers, pipelines outside factories, vehicles seating up to 13 persons, vehicle leasing
- No show-cause notice proposed below ₹10,000; about 95,000 such notices a year arise from return mismatches, with recovery of only about 0.08% of sums involved
- Annual returns with quarterly payment proposed for businesses with turnover up to ₹5 crore supplying only unregistered customers
- Automated registration within 3 working days; this route already covers 61% of registrations
- GST rate rationalisation in force since 22 September 2025