From Arrest to Auto-Refund: Key GST Changes Proposed in 57th GST Council Meeting

Summary: The 57th GST Council Meeting, held in New Delhi on 8 October 2026 under the chairpersonship of the Union Finance Minister, recommended wide-ranging changes to GST law and administration, focusing on procedural simplification, faster refunds, improved input tax credit availability, reduced litigation and greater reliance on automated compliance systems. Major proposals include omission of Section 69 of the CGST Act relating to arrest powers, increasing the prosecution threshold from Rs. 1 crore to Rs. 5 crore, automated refund sanction, and extending refund eligibility to input services and capital goods in specified circumstances. The Council also recommended relaxing blocked ITC restrictions under Section 17(5), introducing a Rs. 10,000 threshold for issuance of certain tax notices, rationalising penalties, and providing safeguards against arbitrary blocking of ITC under Rule 86A. Proposed changes to interception and detention of goods would restrict routine checks and introduce higher-level authorisation requirements. Export-related recommendations include allowing services supplied by Indian establishments to their foreign branches to qualify as exports and clarifying the treatment of supplies involving SEZs and FTWZs. Other proposals address automatic registration amendments, correction mechanisms for GSTR-3B, statutory recognition of the Invoice Management System, late-fee relief for smaller taxpayers, and an optional Annual Return Quarterly Payment scheme. The recommendations collectively indicate a proposed transition from officer-driven administration towards system-based processing, risk assessment and improved adjudication. Most measures require amendments to the relevant Acts and Rules before becoming operative.

Opening Thoughts: The 57th meeting of the GST Council was held in New Delhi on 08.10.2026 under the chairpersonship of the Union Finance Minister. The 56th meeting last year was about rates. This meeting is all about processes. The Council has recommended a series of significant changes to the GST Act and Rules, primarily aimed at ease of doing business, simplification of compliance, faster refunds, smoother flow of ITC, reduction of litigation and, most importantly, building a more trust-based tax administration. Some of the key changes recommended in the meeting are discussed hereunder.

Why this meeting is different

When we read a list of Council decisions, we usually ask only one question. What is the change? I feel the better question is a different one. Why has the Government felt the need for this change now?

Almost every recommendation of the 57th meeting has a story behind it. Some are a response to court judgments. Some are a response to complaints from the trade. Some correct a scheme that did not work as expected in the field. Once we understand the story, the amendment becomes easy to remember.

1. Power of Arrest removed and prosecution to be narrowed

Change

Section 69 of the CGST Act, which gives the power of arrest, has been proposed to be omitted completely. The monetary threshold for prosecution is to be raised from Rs. 1 crore to Rs. 5 crore. In Section 132(1), clause (i) is to be omitted. The words “evades tax” will go from clause (e), and the words “or in any other manner deals with” will go from clause (h). Clause (c) will cover only fraudulent availment of ITC without receipt of goods or services, or without an invoice. Punishments are also to be rationalised.

Background

Arrest under GST has been a sensitive subject from day one. In  Radhika Agarwal v. Union of India,  the Hon’ble Supreme Court upheld the validity of Sections 69 and 70. But the Court was clearly unhappy with one practice. Taxpayers were being made to pay tax during search and investigation, under the fear of arrest. The Court said that payment must be voluntary and that arrest cannot be used as a shortcut for recovery. Media reports before the meeting also mentioned that GST authorities made 887 arrests between the financial years 2021-22 and 2024-25. So the Hon’ble Supreme Court said “use it carefully”. The Council has now gone one step further and said “do not keep it at all”. However, deliberate fraud will still be punishable through prosecution. What goes away is the power of the officer to arrest during the course of investigation.

2. Automated Refunds

Change

In Phase 1, refund of excess balance in the electronic cash ledger will be sanctioned fully by the system. The time for acknowledgement or deficiency memo will come down from 15 days to 10 days, failing which acknowledgement will be deemed. For zero-rated supplies and inverted duty structure, 90% of the claim will be sanctioned provisionally by the system, based on its own risk evaluation. In Phase 2, even acknowledgement will be automatic, and zero-rated refunds will be sanctioned in full by the system after adjusting pending dues, if any.

Background

It is worth remembering that after the 56th meeting, the Council proposed suitable amendments in Section 54 and Rule 91 to include that 90 % of the refund shall be sanctioned provisionally based on the risk para meters identified by the system. But the final decision still stayed with the proper officer. The officer could withhold the provisional refund by recording reasons. In the field, the result was not as expected. Some State jurisdictions were asking for documents beyond what is prescribed. The experience also differed from State to State. The trade suggested system-generated provisional refunds for low-risk taxpayers, which resulted in automated sanction of provisional refund by the system based on risk evaluation without intervention of the officers.

Other changes related to refund

Rule 89(4)(C)limits the turnover of zero-rated supply of goods to 1.5 times the value of like goods supplied domestically. This restriction is to be removed. This cap was brought in March 2020 to stop inflated export values. Further an explanation to Section 54(14) will clarify that the Rs. 1,000 minimum refund applies to the total of CGST, SGST and IGST together, and not head-wise.

3. Refund of ITC on input services and capital goods

Change

Under clause (ii) of the proviso to  Section 54(3)inverted duty refund presently covers only credit on inputs, i.e., goods. ITC on input services and capital goods stays locked. The Council has recommended refund of ITC on input services for inverted duty cases, for ITC availed on or after 01.11.2026. It has also recommended refund of ITC on capital goods for both zero-rated and inverted duty cases, spread over 60 months, for ITC availed on or after 01.04.2027. I personally feel that introduction of separate electronic credit ledger for capital goods and suitable columns in GSTR-3B may help. However, as of now there is no announcement for such ledger. We have to wait for the official amendments.

Background

It may be worth remembering that this anomaly reached the Supreme Court in Union of India v. VKC Footsteps India Pvt Ltd. The Court upheld the law as it stood, because exclusion of input services was a policy choice of the legislature. But it also noted the anomaly and left it to the GST Council to reconsider, which resulted in partial allowance of ITC on input services under inverted duty refund cases from July 2022. It is pertinent to note that the 60 months period for ITC on capital goods matches the five-year life already used inRule 43  for apportionment of capital goods credit. It also spreads the revenue impact over a longer period instead of a one-time outflow.

4. Blocked credit

Change

Section 17(5) is to be amended to remove the restrictions on several items. These include outdoor catering, health and life insurance, telecommunication towers and pipelines laid outside factory premises. Free samples, and goods destroyed or written off on expiry of shelf life as required by law, are also covered.

Background

Telecom towers are a good example of litigation driving the law. The Explanation to Section 17 excludes telecommunication towers from “plant and machinery”. The department used this to deny ITC. However, under the CENVAT regime, the Hon’ble Supreme Court had already allowed credit on towers in Bharti Airtel Ltd. v. Commissioner of Central Excise, Punetreating them as movable.

Free samples and expired goods are different. Here the logic is cascading. Medicines destroyed on expiry are destroyed because the law requires it. Denying credit on them simply adds tax to the cost of compliance.

On a related note, limited credit “in the same line of business” is to be allowed for restaurant and outdoor catering services, hotel accommodation up to Rs. 7,500 per unit per day, and gym or fitness services.

5. Notices and penalty. Why charge, not penalty

Change

The Council has recommended the following.

• No show cause notice under Sections 73, 74 or 74A if the tax involved is less than Rs. 10,000 (CGST, SGST, IGST and Cess together). Pending notices and appeals below this amount will be decided as if the threshold was in force when the notice was issued.
• Where full tax is paid voluntarily with interest and penalty within the time limit, the penalty will be deemed as “charge”. It may be worth remembering that similar amendment was made under Section 28 of the Customs Act,1962 too in the last Budget (2026). The same reason is now extended to GST too. Sometimes, even when the taxpayers are ready to pay the amount and chose not to litigate, the term/head as the amount paid is presently accounted for as “penalty”, resulting in adverse accounting, audit, and reputational implications, thereby discouraging such voluntary payment. To address this, GST Council has now re-characterised the penalty paid in voluntary compliance cases as a “charge.
• A reduced penalty of 5% in non-fraud cases, if tax and interest are paid within 30 days (Section 73) or 60 days (Section 74A) of the order. The minimum penalty of Rs. 10,000 in non-fraud cases is to be omitted.
• The maximum general penalty under Section 125 will come down from Rs. 25,000 to Rs. 10,000.
• In penalty-only orders, pre-deposit for appeal will be capped at Rs. 40 crore (Rs. 20 crore CGST and Rs. 20 crore SGST/UTGST).
• A comprehensive circular on the quality of notices and orders, proper invocation of fraud or suppression, and personal hearings.

Background

A large number of writ petitions are allowed nowadays for reasons like no personal hearing, a non-speaking order, or extended period invoked without any material. Each such quashing means the whole exercise starts again. A uniform standard would reduce this.

Notices for multiple financial years

The Council has recommended a validation clause in CGST Act 2017 for notices held invalid by courts only because they covered more than one financial year. This issue divided the High Courts. Different High Courts take different views. It was already reported in the news that ASG informed the High Court that the Govt. was working on such validation and requested the case to be kept pending.

Rule 86A

Rule 86A provides blocking of ineligible ITC. The present provision does not mandate any opportunity for the taxpayers. Now it is recommended to provide for an objection to be filed and a personal hearing against blocking of credit. Courts have repeatedly set aside blocking done without hearing.

Interest on refund of pre-deposit

Section 115 is to become a standalone provision on interest for refund of pre-deposit, because there were doubts on whether 6% or 9% applies and from which date it runs. Apart from the proposed amendment, a Circular also will be issued to clarify the doubts in this regard.

6. Interception of goods: only on intelligence

Change

I personally feel that this amendment would receive wide appreciation among the trade. It is proposed that a vehicle can be intercepted only on specific intelligence and with authorisation of an officer not below the rank of Joint Commissioner. Detention or seizure can be made only in the State where the supplier or recipient is located or registered, so there will be no interception in transit States. Confiscation under Section 130 will not apply to goods in transit. However, where there is no e-way bill or no document showing origin or destination, action can be taken anywhere.

Background

Detention of goods for small technical lapses, such as an expired e-way bill or a wrong vehicle number, has been one of the most litigated areas in GST. A well-known example is. Circular No. 161/17/2021-GST, The vehicle was held up by a road blockade, and the e-way bill expired in the meantime. The Telangana High Court set aside the detention, and the Supreme Court refused to interfere.

7. Export of services and SEZ supplies

Change

Sub-clause (v) of Section 2(6) of the IGST Act is to be omitted. Services supplied by an Indian company to its own foreign branch can be qualified as export. Clause (a) of Section 13(3) is also to be omitted, so services on goods made physically available by a foreign recipient will follow the location of the recipient.

Background

Under Explanation 1 to Section 8 of the IGST Act, an Indian establishment and its foreign branch are establishments of distinct persons and hence, supply of service is not qualified as “export of service”. Circular No. 161/17/2021-GST, dt 20.09.2021 clarified that services to a foreign subsidiary (a separate company) can be export, but services to a foreign branch cannot. This hit IT and back-office service providers who operate through branches. Removing condition (v) treats the branch route like the subsidiary route.

8. Deeming provisions for SEZ supply

A significant recommendation is the introduction of a deeming provision for transactions where goods are sold to an overseas buyer but are delivered to an SEZ or FTWZ in India. Such supplier will now qualify as supply to SEZ. Under the existing provisions, the tax treatment of such transactions is somewhat ambiguous, as the transaction does not clearly qualify either as an “export of goods” or as a “zero-rated supply to an SEZ unit/developer.” The position under the existing provisions is as follows:

8.1 It does not qualify as an export of goods

Section 2(5) of the IGST Act defines “export of goods” as taking goods out of India to a place outside India. In this case, the goods remain within India and are delivered to an SEZ or FTWZ. Therefore, the transaction does not fit within the conventional export route contemplated under Section 16(1)(a) of the IGST Act.

8.2 Whether it qualifies as a supply to an SEZ is also questionable

As per Section 16(1)(b) supplies made TO an SEZ developer or an SEZ unit is considered as “zero-rated supply”. However, in this transaction, the foreign buyer is the recipient, the invoice is raised on the foreign buyer, and the consideration is also received from the foreign buyer. The SEZ unit or FTWZ is merely the place where the goods are delivered.

9. Registration and returns

Registration

Amendments to registration, except Principal Place of Business, will be approved automatically. For those registered under Rule 14A, even PPoB changes will be automatic. Cancellation applications will be accepted by the system once returns are filed and dues are paid. A new Rule 14B will allow small sellers on e-commerce platforms to register in another State by declaring the operator’s warehouse as their PPoB.

Returns

A new mechanism will allow liability and ITC in GSTR-3B to be corrected so that they align with GSTR-1 and GSTR-2B. New rules will give a legal basis to the Invoice Management System, a statement for reverse charge tax and credit, and a statement for credit reversal and reclaim. These changes will take place w.e.f. April 2027 onwards.

10. Relief for small taxpayers

Late fee on a delayed return under Section 39(1) will be waived for taxpayers with turnover up to Rs. 5 crore, if the return is filed by the end of the month in which it was due. In other words, if such small taxpayers files GSTR-3B by 30th / 31st, instead of 20th of the subsequent month, there will be no late fee. In essence, the small taxpayers enjoy no late fee for another 10/11 days. However, it is pertinent to mention that there is no recommendation for waiver of interest in such cases. What is waived is late fee only, not interest.

The Council has also approved in principle an optional Annual Return Quarterly Payment (ARQP) scheme for taxpayers up to Rs. 5 crore who supply only to unregistered persons (B2C). Such small shops and service providers do not pass on credit to anyone, so monthly reporting adds little value for them.

11. Rate and other clarifications in brief

Rule 96(10)

Its omission is to be effective from 23.10.2027. In  Goodluck India Ltd v. Union of India, the Hon’ble Supreme Court held that the omission made in October 2024 applies to all pending proceedings. The Council is now aligning the law with that decision.

Foreign shipping lines

Import of services without consideration by an Indian establishment of a foreign shipping company from a related person is to be exempted. The past period will be regularised on “as is where is” basis. “As is where is” basis is a phrase the GST Council uses when it settles a past dispute without disturbing what has already happened. It means: accept the past period as it stands.

Second-hand vehicles

Dealers under the margin scheme can take credit on spares, repairs, rent, advertisement and similar items. Only credit on the vehicles bought is restricted.

Scrap

Plastic waste, e-waste, tyre scrap and used cooking oil supplied by unregistered persons will come under reverse charge, with 2% TDS on B2B supplies. Scrap trade has long been seen as prone to fake invoicing, and this appears to close the gap from both ends.

Delivery through e-commerce

Delivery services by unregistered persons through an ECO will come under Section 9(5), at 5% without ITC.

Others

5% option with restricted ITC for passenger transport and rental using electric vehicles. Transfer of IPR, whether temporary or permanent, to be treated uniformly as a service.

Closing Thoughts

The 57th meeting tries to shift GST from an officer-driven law to a system-driven law. Exporters, small taxpayers, transporters and businesses with blocked credit will benefit the most. For officers, the work will move from routine sanction to risk analysis and quality adjudication. Most changes need amendments in CGST and IGST Acts and relevant Rules. Till then, the existing law applies.

******

Author:  Shri. A . Siva, Superintendent of CGST & Customs, Tuticorin

(DISCLAIMER: (i) The views expressed in this article are strictly confined to the author’s personal views only based on the available information. (ii) The author disclaims all liability in respect of any action taken or not taken based on this article)