15 Vital Recommendations for GST for Budget 2026

The “15 Vital Recommendations for GST for Budget 2026” propose practical reforms to restore GST neutrality, reduce litigation, and unlock working capital. A key suggestion is to revisit Section 17(5) blocked credits and align them with Income-tax principles so that ITC is allowed for genuine business expenditures. Another major reform is to decouple recipient ITC from supplier tax payment under Section 16(2)(c), ensuring bona fide buyers are not punished for supplier defaults. To curb avoidable notices, monthly ITC matching (GSTR-2B vs GSTR-3B) is recommended to be replaced with annual matching through improved GSTR-9/9C. Where ITC is reversed due to supplier non-payment, a system should automatically restore credit once tax is later recovered from the supplier to prevent double collection. Several recommendations focus on cash flow: allow ITC ledger use for RCM payments, enable inter-state transfer of accumulated ITC during mergers/shifts, and permit refund of closing ITC balances annually and on business closure. Sectoral clarity is sought for e-commerce operators’ credit usage, and for GST treatment of crypto/NFTs via specific guidelines. The paper also urges correction of policy distortions such as taxing hospital room rent above ₹5,000 contrary to composite supply principles. It proposes phased inclusion of petroleum products like ATF/natural gas under GST, relief for revenue-neutral place-of-supply errors, exemption clarity for EV charging as electricity supply, rational export refunds for CIF contracts using invoice/CIF value, and expanding inverted duty refunds to include input services and capital goods.

1. Alignment of Section 17(5) with Income Tax: Currently, Section 17(5) lists various “blocked credits” that prevent businesses from claiming tax back on legitimate costs. It is recommended that these restrictions be revisited and aligned with the Income Tax Act to allow ITC for all expenditures incurred for business purposes. This would simplify compliance and ensure businesses only pay tax on the actual value added.
2. Decoupling ITC from Supplier Payment: Section 16(2)(c) currently makes the recipient’s credit dependent on the supplier actually paying the tax to the government. This places an unfair burden on bona fide businesses for factors beyond their control. The law should be amended to ensure that if a transaction is genuine and supported by valid invoices, the recipient’s ITC is not denied due to supplier default.
3. Yearly instead of Monthly ITC Matching: The current system of monthly comparison between Form GSTR-2B and GSTR-3B leads to unnecessary notices for minor timing differences. The recommendation is to move to a yearly matching mechanism, supported by amended GSTR-9 and GSTR-9C forms, to reduce the administrative burden on both taxpayers and the department.

1. Restoration of Denied Credit on Recovery: There is currently no transparent system to inform recipients if the government later recovers tax from a defaulting supplier. It is recommended that a mechanism be introduced where ITC previously reversed by a recipient is automatically restored once the supplier remits the tax. This ensures the government does not end up collecting the same tax twice.
2. Utilizing ITC Ledger for RCM Payments: Currently, RCM liabilities (such as on import of services) must be paid in cash, even if the taxpayer has a high ITC balance. This leads to unnecessary cash blockages and working capital issues. Allowing taxpayers to use their electronic credit ledger balance to discharge RCM liabilities would streamline cash flow without reducing government revenue.
3. Inter-State Transfer of Accumulated ITC: While Form ITC-02 allows credit transfers within a state, there is no mechanism for transferring credit when a business moves or merges across different states. This results in locked working capital and potential loss of legitimate credits. A new procedure is recommended to allow seamless inter-state ITC transfers during business reorganizations or closures.
4. Refund of Closing ITC Balances: Under the GST framework, refunds of accumulated ITC are limited to specific cases like exports or inverted duty structures. This creates a permanent cost for businesses with closing balances, especially upon business closure. It is recommended to allow refunds of unutilized ITC at the end of the financial year and upon exiting operations to ease financial burdens.
5. Clarification for E-commerce Operators (ECOs): Recent circulars clarify ITC for ECOs but restrict the use of credit to pay tax liabilities under Section 9(5). Since Section 9(5) does not explicitly categorize these as “reverse charge,” there is no legal basis for this restriction. The recommendation is to align the rules with Section 49(4) to allow ECOs to use their credit ledger for these payments.
6. GST Framework for Crypto and NFTs: While the Income Tax Act addresses Virtual Digital Assets (VDAs), their treatment under GST remains ambiguous. This lack of clarity leads to potential disputes and compliance hurdles for the digital asset economy. Specific classification and taxation guidelines are essential to align India with global best practices and provide legal certainty.
7. Prevention of Artificial Splitting in Healthcare: Healthcare services are generally exempt, but the government has artificially split the service by taxing room rent exceeding ₹5,000. This violates the “composite supply” principle where naturally bundled services should follow the tax treatment of the principal supply. The recommendation is to revisit this entry and restore the full exemption for bundled in patient services.
8. Phased Inclusion of Petroleum and Natural Gas: Key energy sources like ATF and Natural Gas remain outside the GST net, leading to blocked credits and higher costs for industries. A well-planned, phased approach is recommended to bring these products under GST. This inclusion would ensure a uniform tax structure and benefit the aviation and industrial sectors significantly.
9. Relief for Place of Supply Errors: Currently, relief under Section 77 is limited to incorrect classification between intra-state and inter-state supplies. It does not cover cases where IGST is paid but credited to the wrong state due to reporting errors, leading to unjustified interest demands. Expanding the scope of Section 77 to include these revenue-neutral errors would prevent unfair penalties.
10. GST Exemption for EV Charging Stations: There is confusion over whether EV charging is a supply of “goods” (electricity) or a “service,” impacting the tax rate. Currently, consumers at home pay no GST while commercial users pay 5%, creating an unfair disparity. Explicitly clarifying that EV charging is an exempt supply of electricity would accelerate the growth of India’s green infrastructure.
11. Rationalizing Export Refunds for CIF Contracts: For export of goods under CIF contracts, the GST system currently uses the lower “FOB value” for refund calculations instead of the actual invoice value. This results in a significant loss of refund on insurance and freight costs for the exporter. The recommendation is to use the CIF value in the formula to ensure exporters get a full refund of their input taxes.
12. Extending IDS Refunds to Services and Capital Goods: The current formula for Inverted Duty Structure (IDS) refunds only accounts for “input goods,” ignoring services and capital goods. This leaves a large portion of ITC permanently blocked for manufacturers, particularly MSMEs. Amending Rule 89(5) to include these costs would align the refund framework with the principle of tax neutrality.