Looking beyond GST 2.0: Why compliance reforms are the next big test

The next phase of GST reforms, promises simpler registration, quicker refunds and wider input tax credit, but businesses say deeper structural and administrative changes are needed

A year after rationalising indirect tax rates, the Goods and Services Tax (GST) is entering a new phase of reform. The first big reset - GST 2.0, unveiled in September 2025 - sought to simplify the tax structure. The second phase of GST 2.0, announced earlier this month and set to roll out November 1, 2026, is aimed at making the system easier to navigate through simpler registration, faster refunds, wider availability of input tax credit (ITC) and more predictable enforcement.

 

The 57th meeting of the GST Council earlier this month, which cleared the process reforms reflects a recognition that the success of GST depends not just on the tax structure, but also on how it is administered.  

 

Simplifying compliance for small businesses

 

Simpler GST compliance is particularly important for small businesses and online sellers looking to expand beyond their local markets.

 

The latest changes seek to ease some procedural hurdles faced by smaller sellers, but they do not resolve the wider difficulties of operating across multiple states. Industry believes more needs to be done to simplify GST compliance, reduce unnecessary notices and address gaps in the tax system.

 

“Businesses operating across multiple states should be allowed to operate under a single GST registration, rather than having to maintain separate registrations in every state. This would simplify compliance, reduce administrative costs, and ease the process of managing GST returns and other requirements,” said Dinesh Singhal, managing director of Kanohar Electricals Ltd, which is headquartered in Meerut and operates across several states.

 

Singhal also called for extending faceless assessments to state GST authorities to improve transparency and consistency while reducing interaction between taxpayers and tax officials.

 

He said notices over mismatches between two GST returns — GSTR-1, which records details of a business’s outward supplies, and GSTR-7, which reports tax deducted at source under GST — should be stopped.

 

From the industry's perspective, the problem is that digitisation does not automatically translate into simpler compliance. When routine data discrepancies trigger notices, businesses must spend time and money responding to the tax administration even when the underlying issue may not warrant further action.

 

What structural changes do businesses want under GST?

 

Beyond procedural changes, tax experts argue that the next stage of GST reform must address structural limitations that continue to affect tax neutrality and compliance.

 

Experts said bringing goods that remain outside GST, including electricity and petroleum products, into the tax framework, further liberalising ITC restrictions, and allowing refunds of accumulated credits would help make the regime more comprehensive.

 

They also called for moving towards a single-rate, single-tax structure, a single return for compliance and a mechanism to refund GST to tourists. These demands underline the difference between making the existing system work better and addressing its underlying design limitations.  

 

The exclusion of electricity and petroleum products from GST has implications for businesses because taxes paid on these inputs cannot generally be credited against GST liabilities in the way eligible GST paid on inputs can. This results in cascading costs across supply chains. Bringing these products into the framework, however, would require agreement between the Centre and states, given their revenue implications, according to Prashanth Agarwal, partner, Price Waterhouse.

 

Blocked credits and working capital squeeze

 

Under GST law, an inverted duty structure arises when a business pays a higher rate of tax on the raw materials it buys than the rate it charges on the finished goods or services it sells. This leads to unused tax credit accumulating in the business's account, which can be claimed as a refund, though only in limited cases.

 

The Council has decided to extend refunds under the inverted duty structure to tax paid on input services from November 1, 2026, subject to specified conditions. The benefit will apply where the higher tax rate arises on raw materials; it will not be available where the inversion exists only on input services. However, some notified items, including edible oils and coal, also remain outside the facility.

 

Agarwal said businesses should be allowed to recover unused GST credit more easily. He argued that a wider refund facility covering accumulated credit on both goods and services, similar to arrangements available under the earlier state-level VAT system, would prevent legitimate credits from remaining stuck and improve cash flow.

 

The issue extends beyond the inverted duty structure. Under GST law, businesses are required to pay tax under the reverse-charge mechanism — where the buyer, instead of the seller, pays GST directly to the government — and GST on imported goods in cash, even when the amount subsequently becomes available as ITC.

 

“This leads to avoidable blockage of working capital and needs to be addressed by allowing such payments to be made through credit in cases where the tax is fully creditable. Separately, large balances of input tax credit can remain stuck because of multi-state registrations or business restructuring. This needs to be addressed by providing mechanisms for the transfer or refund of such accumulated credit,” said Vivek Jalan, partner with Tax Connect Advisory Services.

 

The larger issue is whether businesses can recover eligible tax credits without unnecessary delays or procedural obstacles. When credits remain blocked, the burden extends beyond the tax return: it can constrain the cash available for inventories, supplier payments and expansion.

 

Which expenses could qualify for ITC under GST 2.0?

 

Further liberalisation of blocked ITC could improve tax neutrality by reducing the tax burden on legitimate business expenditure.

 

The 57th GST Council has recommended removing restrictions on certain items under Section 17(5) of the GST law, including outdoor catering, employee health and life insurance, telecommunication towers, pipelines outside factory premises, free samples, and goods destroyed or written off on expiry of shelf life where required by law.

 

However, restrictions relating to certain motor vehicles, construction-related expenditure and corporate social responsibility activities remain in place. A proposal to relax the restriction on motor vehicles was discussed but deferred after some states raised concerns, and the matter has been referred to an officers' committee, said Nimish Bhatia, partner with Price Waterhouse.

 

The changes are a step towards reducing the extent to which GST becomes a cost for businesses rather than a tax that can be credited through the supply chain. But the continued restrictions show that the question of which business expenses should qualify for credit remains contested.

 

“A single return, meanwhile, could reduce repetitive compliance requirements, provided it consolidates reporting obligations without weakening the information available to tax authorities for detecting evasion,” Bhatia said.

 

The Council has also created a committee to recommend safeguards to protect ITC for bona fide buyers.

 

“Denial of ITC to genuine buyers on the supplier’s non-compliance in paying appropriate taxes to the government has been a contentious issue for the industry for a long time. It is important that the Committee seeks industry consultation and lays down clear guidelines and conditions on the satisfaction of which, the buyer’s ITC should be protected. The buyer should then be subject to tax recovery only if it is proven that the buyer has colluded with the supplier for fake ITC malpractices,” Bhatia said.

 

The committee's recommendations will be important in determining whether the system can distinguish between deliberate tax fraud and a genuine buyer's inability to control a supplier's subsequent non-compliance.

 

Can technology fixes remove compliance roadblocks?

 

GST has evolved into a data-intensive tax administration system, relying on electronic returns, invoice matching and information shared across government platforms. As the GST Network interfaces with systems such as the Indian Customs Electronic Gateway, the Reserve Bank of India and SEZ Online, seamless data exchange becomes increasingly important.

 

“Disruptions, data mismatches and delays in information flows can undermine the efficiencies that technology is intended to deliver. For businesses, technical problems can translate into delayed refunds, discrepancies in returns or uncertainty over the availability of ITC,” said a former chairman of the Central Board of Indirect Taxes and Customs who did not wish to be identified.

 

The next phase of reform must therefore focus not only on automating more processes but also on making the underlying digital infrastructure reliable. Interoperability between systems, data integrity and effective grievance redressal will be essential to ensure that procedural simplification translates into tangible benefits, he said.

 

The move towards risk-based and automated processing also raises questions about transparency. Risk profiling can help authorities identify potentially fraudulent claims and speed up the processing of routine cases. But taxpayers should not be left without a clear explanation when their claims are excluded from automated processing or subjected to additional scrutiny, another former CBIC official said.

 

“Tax administrations may need to protect the details of their risk-assessment models to prevent misuse. Even so, communicating the broad reasons for adverse decisions and providing accessible mechanisms for review would help maintain confidence in the system. Automation should reduce unnecessary discretion, not make administrative decisions harder to challenge,” he added.

 

This is an important qualification to the promise of technology-led reform. Automation can reduce routine official intervention, but it cannot substitute for transparent decisions, effective appeals and a system that allows businesses to resolve errors without disproportionate costs.

 

Decriminalisation needs safeguards

 

The Council's proposed changes to GST enforcement are another important element of the shift towards a more trust-based tax regime. The recommendations concerning arrest provisions and the prosecution threshold could help address concerns about the use of criminal proceedings in tax-related matters.

 

But changes to arrest provisions alone will not eliminate concerns about enforcement. Investigative tools such as summons, provisional attachment, and bank account freezing can still have significant consequences for businesses, even in the absence of criminal prosecution, the former chairman said.

 

The practical impact of decriminalisation will therefore depend on how enforcement powers are exercised, not just on changes to the provisions governing arrest and prosecution. Their use must be proportionate and subject to clear safeguards. Consistent procedures, supervisory oversight and accessible remedies against arbitrary action will be necessary to ensure that the objective of decriminalisation is not diluted in practice.

 

Faceless assessments for Central GST accounts could help reduce direct interaction and improve consistency in decision-making. Extending such mechanisms across state GST administrations would require appropriate technology, common procedures and safeguards to ensure that taxpayers can effectively present their cases and challenge adverse decisions, another former official said.

 

Reducing face-to-face interaction is not, by itself, sufficient to guarantee fairer administration. Businesses must also be able to understand adverse decisions, obtain timely reviews and challenge actions that they consider arbitrary.

 

What will determine the success of GST 2.0 reforms?

 

The Council has laid out a direction for the next stage of GST reform. Faster refunds, simpler registration, wider ITC availability and more predictable enforcement could ease the day-to-day burden on businesses. But the benefits will ultimately depend on how far the changes work in practice.

 

Vinod Kumar, president of the India SME Forum, said the refund processes recommended by the Council need to be enabled on the ground; only then will they become smoother for companies. Small businesses also need clear timelines on implementation so they can align their systems accordingly. Even a short delay in refunds or a lack of clarity over implementation can strain cash flow and make it difficult to plan inventories or expansion, he said.

 

Kumar also pointed to the removal of the earlier minimum limit of ₹1,000 on refund claims for goods exported with payment of tax, which is intended to help micro and small exporters making frequent, low-value shipments. However, he said the process for sanctioning such refunds below ₹1,000 had not been fully implemented.

 

That gap between a policy decision and its operational implementation captures the challenge facing the latest round of reforms.  

 

The test of the next phase of GST will be whether it delivers a system in which businesses can claim legitimate credits, obtain refunds predictably and resolve disputes without excessive administrative costs. A simpler tax structure was an important first step. Making compliance less cumbersome and enforcement more transparent and proportionate is the harder task that remains.