The GST Council may consider a proposal aimed at protecting genuine businesses from losing input tax credit (ITC) because of tax defaults committed by their suppliers.
According to a report citing sources, the proposal could allow buyers who have completed genuine transactions and paid the applicable tax to retain their eligible credit even if the supplier subsequently fails to deposit that tax with the government. The issue is expected to be discussed at the GST Council's 57th meeting scheduled for October 7, subject to the required approvals.
Proposed Protection for Genuine Buyers
Under the proposed framework, a buyer may not be denied ITC solely because the supplier has failed to pay the tax to the government.
The approach would shift the focus of tax recovery towards the defaulting supplier rather than penalising a buyer that has fulfilled its own obligations. This could be particularly relevant where a business has received the goods or services, made the payment and possesses a valid invoice.
For businesses, maintaining accurate records and timely GST Return Filing could remain important as the proposed framework develops.
Fraudulent Transactions Would Remain Outside the Protection
The proposed safeguard would not be intended for businesses knowingly involved in fraudulent transactions.
According to the report, tax authorities would continue to have the ability to take action where a buyer participated in or benefited from fraud. Improved invoice matching and stronger links between input and output records could also help identify questionable claims earlier.
Why the Proposal Matters for Businesses
Supplier-linked ITC disputes have been a significant source of concern and litigation. The uncertainty can also make businesses more cautious when choosing smaller or newer suppliers because a supplier's tax default may affect the buyer's ability to claim credit.
A framework that distinguishes genuine buyers from parties involved in fraudulent transactions could potentially provide greater certainty for compliant businesses.
Wider ITC Eligibility Also Under Consideration
The GST Council may also examine proposals to expand ITC eligibility for a range of business-related expenses.
The reported proposals include possible credit for certain employee health and life insurance expenses, outdoor catering, telecommunications towers, pipelines outside factory premises and free samples.
Further proposals could cover certain vehicles with seating capacity of up to 13 people, along with related expenses such as insurance, servicing, repairs, maintenance, leasing, renting and hiring. Credit could also potentially be considered for goods destroyed after their shelf life where such destruction is legally required.
Some Categories Would Remain Excluded
The reported proposals would not remove all existing restrictions on input tax credit.
Certain categories, including works contracts and construction of immovable property, food and beverages, club and gym memberships, personal consumption and corporate social responsibility expenditure, would continue to remain outside the proposed expansion.
GST Council Decision Remains Crucial
The proposals remain subject to consideration and approval by the GST Council. Any changes to ITC eligibility or protection for genuine buyers would ultimately depend on the decisions taken by the Council and subsequent implementation.
For businesses, the potential reforms could be significant because they address two recurring GST concerns: the risk of losing legitimate input credit due to supplier defaults and the scope of expenses for which businesses can claim GST credit.