Income-tax and GST Asymmetries: Issues Affecting Taxpayers and Working Capital

Discrepancies and Asymmetries in Indian Income-tax and GST Laws Issues Affecting Taxpayers, Working Capital and Ease of Doing Business

Summary: The article examines perceived asymmetries in Indian income-tax and GST laws and their practical impact on taxpayer fairness, proportionality, working-capital management, ease of doing business and certainty of taxation. It discusses supplier-default consequences for ITC following the Supreme Court’s decision in Bhandari Scrap Traders v. Union of India dated 24 July 2026, TDS mismatches arising from deductor default, notional taxation of house property, differences between accounting and tax depreciation, differential interest consequences for taxpayer delays and Government refund delays, prolonged litigation, mandatory GST appellate pre-deposits, GSTAT backlog and administrative accountability. The article refers to Section 16(2)(c) of the CGST Act, TDS compliance, house-property annual value, depreciation under the Income-tax and Companies Act frameworks, Section 50 and Section 56 of the CGST Act, the 10% GST appellate pre-deposit, and GSTAT statistics as of August 2026. It proposes policy considerations including protection of bona fide taxpayers, greater accountability of the person responsible for default, more balanced interest treatment, time-bound dispute resolution, calibrated pre-deposit requirements, working-capital neutrality, symmetry and ease of doing business. The article concludes that tax administration should pursue fair, predictable, proportionate and efficient revenue collection while balancing revenue protection, taxpayer rights, working-capital efficiency, speedy dispute resolution and administrative accountability.

Introduction

India has made significant progress towards digitisation, transparency and simplification of tax administration. However, certain provisions and their practical implementation create significant asymmetries between the rights and obligations of the taxpayer and the Government.
In several situations, a taxpayer may be required to bear tax, interest, penalty and litigation costs for circumstances that are substantially outside the taxpayer’s control. At the same time, the financial consequences applicable to the Government for delayed refunds or delayed resolution of disputes may be materially lower.
The following issues merit consideration from the perspective of taxpayer fairness, proportionality, working-capital management, ease of doing business and certainty of taxation.

1. Input Tax Credit and Supplier Default – The Bhandari Scrap Traders Issue

One of the most significant concerns under the GST framework relates to the linkage between the buyer’s entitlement to Input Tax Credit and compliance by the supplier.
The recent Supreme Court decision in Bhandari Scrap Traders v. Union of India, dated 24 July 2026, has upheld the validity of Section 16(2)(c) of the CGST Act and recognised payment of tax by the supplier as a statutory condition for the purchaser’s entitlement to ITC.
This creates a fundamental practical difficulty for a bona fide purchaser. A purchaser may:

• purchase genuine goods or services;
• receive a valid tax invoice;
• make payment through banking channels;
• pay the supplier the consideration including GST;
• receive the goods or services;
• record the transaction correctly in its books;
• report the transaction in GST returns; and

• have no control over whether the supplier ultimately deposits the tax with the Government.

Despite satisfying these conditions, the purchaser may face denial or reversal of ITC if the supplier fails to discharge the corresponding tax liability.

Policy concern

The purchaser and supplier are legally separate taxpayers. The purchaser generally has no effective means of compelling the supplier to deposit tax after the transaction has been completed.

Therefore, while supplier tax payment may legitimately be an anti-evasion safeguard, the complete financial consequence of supplier default can effectively be transferred to a purchaser who may itself have acted bona fide.

Suggested reform

A mechanism could be considered whereby a bona fide purchaser satisfying prescribed conditions is protected, particularly where:

1. the transaction is genuine;

2. goods or services have actually been received;

3. consideration has been paid through traceable banking channels;

4. GST has been charged separately in the invoice;

5. the purchaser has exercised reasonable due diligence; and

6. there is no collusion or fraud involving the purchaser.

In such circumstances, recovery should primarily be pursued against the defaulting supplier rather than automatically denying the purchaser’s substantive credit.

2. TDS – The Taxpayer Bears the Practical Consequence of Another Person’s Default

A similar issue arises under the TDS mechanism.

TDS is fundamentally a collection mechanism, under which the deductor is responsible for deducting and depositing tax and furnishing the relevant information to the Income-tax Department.

The Income Tax Department itself recognises that discrepancies can arise where the deductor fails to furnish TDS details, furnishes incorrect PAN details or otherwise fails to correctly report the deduction. In such cases, the TDS may not appear correctly in the employee’s Form 26AS, creating difficulty in obtaining credit.

The important distinction is that the statutory default is ordinarily attributable to the deductor. The Income Tax Department’s current guidance specifically states that the deductor can be treated as an assessee-in-default and may face interest and penalties for failure to deduct or deposit TDS.

The practical problem

An employee may have:

• received salary;
• had TDS actually deducted from salary;
• received Form 16 or other salary documentation;
• included the income in the income-tax return; and
• paid any additional tax legitimately payable.

However, if the employer does not correctly report the TDS, the employee can face a mismatch and may have to repeatedly approach the employer for correction.
This becomes particularly problematic where:

• the employee has changed employment;
• the employer has ceased operations;
• the employer is unresponsive;
• the employer is undergoing financial difficulty; or
• considerable time has passed since the employment ended.

Policy concern

The tax collection mechanism should not create disproportionate hardship for a taxpayer who has already suffered deduction of tax at source and has independently disclosed the corresponding income.

Suggested reform

Where the taxpayer can establish that:

• income has been duly disclosed;
• tax was actually deducted; and
• the taxpayer has otherwise complied with the law,

a simplified mechanism should exist for granting TDS credit subject to verification, without making the taxpayer dependent entirely upon the subsequent compliance of the deductor.

3. Taxation of Notional Income from House Property

The Income-tax framework contains another example of taxation based on notional rather than actual cash income.
Income from house property is generally computed on the basis of the property’s annual value. The Income Tax Department expressly recognises that annual value may be determined on a notional basis, including in the case of a deemed let-out property where no actual rent has been received.
In the case of a person owning more than two houses, only two properties can generally be treated as self-occupied, while other qualifying properties may be treated as deemed let-out and an expected rental value may be considered even though no rent is actually received.

Policy concern

This creates a situation where:

No actual cash inflow → but taxable income may arise.

Taxation ordinarily follows the principle that income represents an economic benefit received or accrued to the taxpayer. Taxation of notional annual value therefore creates a disconnect between:

• actual cash income;
• taxable income; and
• the taxpayer’s ability to discharge the resulting tax liability.

This is particularly relevant where properties are held for genuine personal, family, investment or other non-income-generating purposes.

Suggested reform

The Government could consider reviewing the scope of deemed/notional taxation of house property, particularly where:

• no actual rent is received;
• the property is not commercially exploited;
• the taxpayer has not generated any corresponding cash flow; and
• the property is held for genuine personal or long-term purposes.

4. Different Depreciation Frameworks – Income-tax and Companies Act

Another area of complexity arises from the difference between depreciation for financial reporting purposes and depreciation allowable for income-tax purposes.

The Companies Act framework generally requires depreciation to be based on the useful life and other accounting principles prescribed for financial statements, whereas tax depreciation operates under the specific depreciation provisions of the Income-tax law.

The Income-tax Act provides a separate statutory framework for depreciation of qualifying tangible and intangible assets.

Consequently, the depreciation charged in the financial statements may differ from the depreciation allowable under tax law.

Consequences

This creates:

• book-tax differences;
• deferred tax implications;
• additional tax computation complexity;
• reconciliation requirements;
• additional professional and compliance costs; and
• difficulty for businesses in understanding the actual economic tax burden.

For businesses, the same asset therefore effectively has two depreciation lives and two computation mechanisms:

Accounting depreciation – financial reporting

Tax depreciation – taxable income

Policy concern

While separate accounting and taxation frameworks may be justified, excessive divergence increases compliance complexity without necessarily improving tax administration.

Suggested reform

Greater harmonisation between accounting and tax depreciation rules could be considered wherever commercially and fiscally feasible.
At a minimum, simplification of the reconciliation mechanism and greater alignment of useful-life concepts could reduce compliance costs.

5. Asymmetry in Interest – Taxpayer’s Delay versus Government’s Delay

A particularly important issue is the differential financial consequence of delayed payment by a taxpayer and delayed refund by the Government.
Under Section 50 of the CGST Act, interest on delayed payment of tax can be prescribed up to 18% per annum, while interest on certain undue or excess ITC claims can be prescribed up to 24% per annum.

On the other hand, Section 56 provides for interest on delayed refunds at a rate not exceeding 6%, with a higher rate of up to 9% in specified circumstances involving refunds arising from orders of adjudicating/appellate authorities or courts.

The asymmetry

The taxpayer can therefore face a substantially higher financial cost when money is owed to the Government than the Government may face when money belonging to the taxpayer remains with the Government.

This becomes particularly significant when:

• a dispute remains unresolved for several years;
• a taxpayer has paid tax under protest;
• an ITC dispute is subsequently decided in favour of the taxpayer; or
• a refund remains pending.

Policy concern

The financial cost of delayed payment should ideally reflect a broadly proportionate principle irrespective of whether the debtor is the taxpayer or the Government.

Suggested reform

A review may be considered to establish a more balanced and economically rational interest regime, particularly for prolonged retention of legitimate taxpayer refunds.

6. Prolonged Litigation and the Compounding Effect of Interest and Penalty

Tax disputes can take several years to reach finality.

When a dispute remains unresolved for an extended period, the taxpayer’s exposure may increase substantially because the original tax demand can be accompanied by:

• interest;
• penalty;
• litigation costs;

• professional fees; and
• blocked working capital.

The longer the dispute remains unresolved, the greater the financial burden becomes.

The problem of time

A tax dispute relating to an old transaction may therefore become economically disproportionate even where the underlying disputed amount was relatively modest.

For example:

Original dispute – ₹10 lakh

Several years of interest – substantially higher liability

Penalty – additional liability

Professional and litigation costs – further financial burden

The taxpayer may ultimately face a liability several times the original disputed amount.

Policy concern

A taxpayer should not suffer an unlimited compounding financial burden merely because the dispute resolution process itself takes several years.

Suggested reform

Consideration could be given to:

• time-bound disposal of tax disputes;
• rationalisation of interest during prolonged litigation;
• waiver/reduction of penalty where the issue involves a bona fide interpretational dispute;
• limitation on disproportionate accumulation of interest and penalty; and
• accelerated resolution of legacy cases.

7. Mandatory Pre-deposit for GST Appeals – Direct Impact on Working Capital

The GST appellate mechanism requires the taxpayer to make a mandatory pre-deposit for filing an appeal before the Appellate Authority.
The statutory framework requires payment of admitted dues and 10% of the remaining disputed tax for an appeal before the Appellate Authority. CBIC’s GST FAQ also confirms the 10% requirement and explains that recovery of the balance is stayed upon making the prescribed pre-deposit.
While the requirement is intended to discourage frivolous litigation and ensure commitment to the appellate process, it can create significant working-capital pressure for genuine taxpayers.

Working-capital impact

Consider a disputed tax demand of:

₹1 crore

A taxpayer may have to arrange:

₹10 lakh as pre-deposit

This amount remains financially locked until the litigation process ultimately reaches a stage at which the amount can be recovered/refunded.

For larger enterprises, the impact can be considerably greater when several disputes are simultaneously pending.

Policy concern

Tax disputes are not merely legal disputes. They are also cash-flow events.

A business may be profitable on paper but face severe liquidity pressure because significant amounts are blocked in:

• tax pre-deposits;
• disputed tax demands;
• reversed ITC;
• delayed refunds; and
• litigation-related payments.

Suggested reform

A calibrated mechanism could be considered whereby the pre-deposit is linked to factors such as:

• strength of the taxpayer’s prima facie case;
• financial standing;
• past compliance record;
• nature of the dispute;

• whether the dispute involves interpretation rather than suppression/fraud; and
• amount already deposited.

This would protect Government revenue while reducing unnecessary working-capital stress on compliant businesses.

8. Delay in Appellate Resolution and the GSTAT Backlog

The effectiveness of any tax law depends not merely on the quality of the legislation but also on the speed with which disputes can be resolved.
The GST regime has experienced significant delays in appellate resolution. Historical CAG data itself records substantial pendency of GST appeal matters and demonstrates the age profile of pending tax appeals.

The situation has been particularly challenging because the GST Appellate Tribunal mechanism took several years to become operational.

As of August 2026, GSTAT’s own statistics show a substantial volume of cases filed, while the number registered and disposed remains considerably lower.

The larger concern

For a taxpayer, the consequences of a pending appeal are not limited to legal uncertainty.

A disputed demand can result in:

• blocked working capital;
• inability to obtain a clean tax position;
• uncertainty in financial reporting;
• difficulties in business planning;
• continuing interest exposure;
• professional costs; and
• management time spent on litigation.

Therefore, justice delayed in taxation becomes financially expensive.

Suggested reform

A structured mechanism for time-bound disposal may be considered, including:

1. priority disposal of legacy cases;

2. age-wise classification of pending appeals;

3. disposal targets for appellate authorities;

4. dedicated benches for high-value legacy matters;

5. automated monitoring of cases pending beyond prescribed periods; and

6. periodic public reporting of pendency and disposal.

9. The Common Thread – Taxpayer Accountability Must Be Matched by Administrative Accountability

The above issues point towards a broader principle.
The Indian tax system has progressively increased:

• electronic compliance;
• reporting requirements;
• reconciliation;
• documentation;
• interest provisions;
• penalties;
• pre-deposit requirements; and
• consequences for non-compliance.

These measures are necessary for a robust tax system.

However, the corresponding question is:

Does the system provide an equally strong mechanism for timely administrative accountability?

A balanced tax system should ensure that:

Taxpayer delay – interest and consequences

should be matched by:

Government delay – timely refund, interest and accountability.

Similarly:

Supplier default – supplier should primarily bear the consequence

rather than automatically transferring the entire economic burden to a bona fide purchaser.

And:

Deductor default → deductor should bear the compliance consequence

without creating unnecessary hardship for the employee who has already disclosed the income.

10. Suggested Overarching Reform Principles

The following principles may be considered in future tax-policy reforms:

A. Proportionality: Penalties and interest should be proportionate to the nature and seriousness of the default.

B. Accountability: The person responsible for the default should ordinarily bear the primary consequence.

C. Protection of Bona Fide Taxpayers: A taxpayer who has acted honestly, maintained proper documentation and exercised reasonable due diligence should receive appropriate protection.

D. Time-bound Dispute Resolution: A tax dispute should not remain financially burdensome indefinitely.

E. Working-Capital Neutrality: Tax administration should minimise unnecessary blocking of legitimate business capital.

F. Symmetry: Financial consequences for delayed payment and delayed refund should be reviewed from the perspective of fairness and economic neutrality.

G. Ease of Doing Business: Tax compliance should facilitate legitimate business activity rather than create disproportionate financial and administrative burdens.

Conclusion

The objective of tax administration should not merely be maximum revenue collection, but fair, predictable, proportionate and efficient revenue collection.

India’s tax system has evolved substantially over the last decade. The next stage of reform could therefore focus on a different dimension of taxation:

From compliance enforcement to compliance fairness.

The taxpayer should be accountable for his own actions and omissions. However, the taxpayer should not ordinarily bear disproportionate financial consequences for the default of another independent taxpayer, for administrative delay, or for prolonged litigation.

A modern tax system should seek to achieve a balance between:

Revenue protection + taxpayer rights + working-capital efficiency + speedy dispute resolution + administrative accountability.

Such a framework would strengthen not only taxpayer confidence but also India’s broader objective of ease of doing business, investment, entrepreneurship and sustainable economic growth.

***

Disclaimer: While every care has been taken to ensure the accuracy/ authenticity of the above, the readers are advised to recheck/reconfirm the same from the original sources/ relevant departments. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. By the use of the said information, you agree that the company is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors or any kind of omissions in this piece of information for any action taken thereof. This is not any kind of advertisement or solicitation of work by a professional. The company shall in no way be responsible for any loss or damage suffered to any person on account of the same.