When the Goods and Services Tax (GST) was implemented on July 1, 2017, one of its central promises was to eliminate tax cascading and allow seamless flow of input tax credit (ITC) across the value chain. According to reports from Business Standard, GST has largely succeeded in replacing multiple indirect taxes with a unified system, but input tax credit has become one of the biggest sources of litigation, working-capital blockage and compliance anxiety under the current framework. Swaroop Repaka, head of product at ClearTax, explained that the original design worked on a different principle, stating that the original promise of input tax credit was simple and powerful: kill the cascading of tax and let credit flow seamlessly across the chain. However, the ITC mechanism has quietly changed character from a self-assessed, trust-based model to a verification-based, supplier-dependent one.
Nitin Vijaivergia, partner at Price Waterhouse & Co LLP, told Business Standard that GST was envisioned as a seamless credit-based tax, eliminating cascading and taxing only value addition. However, the architecture of input tax credit has evolved from a seamless tax mechanism into a conditional entitlement. As reported by Business Standard, requirements such as invoice matching, GSTR-2B reconciliation, restrictions under Rule 36(4), Section 16(2)(aa), and now the Invoice Management System (IMS) have made credit eligibility more tightly linked to compliance data. The core problem lies in Section 16(2) of the CGST Act, where Clause (aa) requires suppliers to furnish invoices in their outward returns so they appear in the recipient's auto-populated GSTR-2B, and Clause (c) requires that tax has actually been paid to the government. This creates a structural issue where compliant buyers' credit becomes contingent on supplier conduct they cannot control.
For businesses, delayed or denied credit directly affects cash flows under the current system. According to Business Standard, companies may have purchased goods, paid suppliers and fulfilled their obligations, but still face delays if supplier filings do not reflect correctly. The Finance (No. 2) Act, 2024 introduced meaningful corrections with Section 16(5) and Section 16(6) providing retrospective relief from July 1, 2017, relaxing time bars for financial years 2017-18 to 2020-21 and addressing credit in cases where cancelled registrations were later revoked. However, the 180-day rule under Section 16(2) requires reversal where suppliers are not paid within 180 days of invoice, while Rule 37A mandates reversal when suppliers file GSTR-1 but fail to file corresponding GSTR-3B by September 30 of the following year. Sectors with long supply chains or refund dependence are particularly exposed to these challenges.
Vijaivergia noted that supplier-side compliance defaults frequently disrupt the flow of input tax credit, with inverted duty structures continuing to create working-capital stress in sectors such as FMCG, textiles, footwear, fertilisers and renewable energy. As reported by Business Standard, Ranjeet Mahtani from Dhruva Advisors highlighted that construction remains particularly vulnerable because project revenues arrive over longer cycles while input costs arise upfront. The practical impact is most severe in three situations: exporters facing zero-rated output with taxed inputs where credit piles up pending refunds, inverted duty structures where input rates exceed output rates making recovery only through refunds with formula limits, and supplier-default reversals where cash outflow occurs before recovery from suppliers becomes uncertain. The Invoice Management System (IMS) has shifted reconciliation from month-end clean-up to continuous activity, requiring proactive rather than reactive approaches to credit protection.
Tax experts argue that the next stage of GST reform may not be about introducing new rules but reducing procedural friction. According to Business Standard, businesses want greater certainty that genuine credit will not be denied because of supplier defaults outside their control. Simpler reconciliation processes, clearer buyer protections, faster refunds and easier correction mechanisms remain among the key demands. The harshness of current ITC rules has been partially addressed through recent legislative corrections, but the core dependency on supplier conduct remains. Practitioners recommend preventive rather than reactive approaches, protecting credit at procurement stage through filing-disciplined vendors and building supplier compliance into purchase decisions, followed by monthly GSTR-2B and IMS reconciliation rather than annual reconciliation under audit pressure. Repaka emphasized that the system has been optimised for revenue protection and the next phase should focus on restoring ease of doing business.
