GST – A Framework Against the Taxpayer – My way or No Way

Since its introduction in July 2017, the Goods and Services Tax (GST) has been celebrated as a landmark reform in India’s indirect taxation system. With the promise of simplification, transparency, and seamless credit across the value chain, GST aimed to create a unified national market. However, after several years of implementation, it is increasingly evident that the law—though conceptually sound—is structurally and procedurally harsh in its application, often at the cost of genuine taxpayers. It is not user friendly and it’s motto is Either My way or No Way.

This article highlights specific provisions and practical challenges where the GST law reflects a “my way or no way” approach—leaving little room for bonafide errors, system inefficiencies, or economic realities. These areas deserve urgent attention and reform to truly make GST a “Good and Simple Tax.”

1. ITC Denied Due to Supplier’s Non-Filing of GSTR-1

A prime example of taxpayer hardship is the restriction of Input Tax Credit (ITC) if the supplier fails to file GSTR-1 by the 11th of the succeeding month. The buyer, despite fulfilling all conditions—receipt of goods, payment to the supplier, and having a valid tax invoice—is denied ITC simply because of the supplier’s non-compliance.

This results in taxation of the gross value instead of value addition, particularly harming low-margin businesses. The buyer ends up paying output tax in full, without the benefit of input credit, thus distorting working capital cycles and defeating the fundamental GST principle of taxing only the value addition.

2. Reverse Charge Mechanism – Procedural Misstep, Heavy Penalty

The Reverse Charge Mechanism (RCM) is designed for certain specified supplies where the recipient pays GST. While RCM payments are typically revenue-neutral (as ITC is available), even a procedural delay in payment attracts interest and penalty under Section 74.

This strict penal approach ignores the absence of revenue loss to the exchequer and the taxpayer’s intent. Treating every RCM non-compliance as suppression or evasion discourages voluntary compliance and increases unnecessary litigation.

3. E-Way Bill – Penalizing Minor Errors in Goods Transit

During transportation of goods, even trivial errors in the e-way bill—such as wrong pin codes or vehicle number mismatches—can lead to detention of goods and vehicles, and imposition of penalties under Section 129.

Drivers, often without legal assistance, are unable to defend themselves. In practice, taxpayers are forced to deposit penalties immediately through DRC-03 to get their goods released. These enforcements are sometimes driven by collection targets, and not materiality or intent, thus damaging ease of doing business.

4. ₹1,000 Tax Default Can Attract ₹20,000 Penalty

GST provisions under Section 74 allow a penalty of ₹20,000 even if the underlying tax and interest liability is only ₹1,000, provided the taxpayer does not respond within the stipulated 30-day window. This lack of proportionality turns minor lapses into major financial burdens, eroding trust in the fairness of the system.

5. Timelines Strict for Taxpayers, Flexible for Authorities

GST imposes rigid timelines on taxpayers—be it return filing, ITC reconciliation, or responding to notices. Delays attract interest, late fees, or suspension of registration.

In contrast, the department enjoys extended timelines—whether in assessment, adjudication, or issuance of notices—often through retrospective amendments or blanket notifications. This asymmetry fosters distrust and suggests that the compliance burden is not equally shared.

6. ITC Denied if Supplier’s Registration is Cancelled

If a supplier’s GST registration is retrospectively cancelled, the ITC claimed by the buyer—based on genuine purchase, payment, and tax invoice—is denied. This penalizes bona fide purchasers for circumstances completely beyond their control.

Such denial contradicts the principle of certainty in taxation and places an unreasonable burden on the buyer to verify the post-facto compliance status of every vendor.

7. DRC-03 – Taxpayers Coerced During Surveys

Although DRC-03 is meant for voluntary payment of tax, in practice, it is frequently used during surveys to obtain on-the-spot payments—often without full adjudication or legal explanation. Taxpayers, fearing harassment or prolonged proceedings, pay under pressure to end the matter.

This practice violates the principles of natural justice and turns surveys into coercive revenue exercises, rather than fact-finding processes.

8. Composition Dealers Asked for Unnecessary Purchase Details

Composition scheme taxpayers, who are neither eligible to claim ITC nor liable under RCM, are still required to report detailed inward supply information in GSTR-4. Curiously, regular taxpayers are not asked for such information in their annual return (GSTR-9).

This adds avoidable compliance burden and undermines the objective of simplicity for small taxpayers.

9. ITC on Capital Goods – Working Capital Blocked

In capital-intensive industries like manufacturing or infrastructure, purchases of plant and machinery attract GST at 18%, resulting in ITC running into crores of rupees. However, this ITC often remains unutilized due to:

• Low output tax in initial periods, or
• Project-based revenue models.

Worse, there is no refund available for unutilized ITC on capital goods. Thus, a taxpayer is left with a credit ledger full of unusable funds, while struggling with real cash flow needs—leading to a systemic working capital crisis, particularly for growing enterprises.

10. CGST-SGST Set-Off Restriction – Creating Imbalance

GST’s ITC utilization rules impose a rigid set-off sequence: IGST credit must first be set off against IGST liability, then compulsorily against CGST, and only then against SGST.

This structure often creates a credit imbalance. For example, in a month with inter-State sales, SGST credit accumulates unused. In the next month, when intra-State sales occur, the taxpayer is forced to pay CGST in cash even though ample SGST credit is available.

This artificial restriction creates cash flow strain and contradicts the concept of seamless credit flow that GST promised.

11. Rising Collections Without Declared Revenue Targets – Enforcement Overdrive

GST revenue collections have more than doubled—from ₹1 lakh crore to ₹2 lakh crore per month. Yet, the Government has not officially declared what the annual or monthly targets are.

In the absence of transparent benchmarks, there appears to be informal revenue pressure on the department. This pressure manifests in:

• Increased surveys and audits,
• Forced payments during visits,
• Transit penalties on minor issues, and
• Overreach in enforcement actions.

It raises a serious question: Is there an invisible, unlimited target driving coercive action? If revenue collection becomes the sole performance metric, the trust-based compliance model of GST will eventually collapse.

Conclusion: Reforms Needed for a Balanced Regime

The GST law, in its current form, often operates on the presumption that the taxpayer is always at fault. Provisions crafted with deterrence in mind are increasingly being used punitively, even in cases of genuine human error, system limitations, or minor non-compliance.

To realign GST with its core promise, the following reforms are essential:

√ Distinguish procedural errors from fraud or evasion – Avoid Section 74 in tax-neutral or minor default cases.

√ Allow refund of capital goods ITC under defined circumstances to ease working capital burden.

√ Protect bona fide buyers from denial of ITC due to supplier non-compliance or cancellation.

√ Permit flexible credit utilization between CGST and SGST, or offer cross-utilization mechanisms with safeguards.

√ Publish transparent revenue targets and shift departmental focus from coercion to facilitation.

Only with these changes can GST become a truly efficient, trust-based, and business-friendly tax system that supports economic growth rather than penalizing it.