GST Council Recommends Major Reforms in ITC Refunds, Blocked Credits and Export Benefits

The GST Council has recommended a series of changes to the Goods and Services Tax (GST) framework to improve the flow of Input Tax Credit (ITC), ease working capital pressure on businesses and simplify GST benefits for exporters. The proposed reforms cover refunds of accumulated ITC on capital goods and input services, removal of certain blocked credit restrictions, and changes to the rules governing exports of goods and services.

The recommendations involve amendments to the CGST Act, 2017, the CGST Rules, 2017, and the IGST Act, 2017. If implemented, these changes could provide relief to manufacturers, service providers, exporters and businesses facing ITC accumulation or uncertainty over export-related benefits.

Reforms for improving seamless flow of Input Tax Credit (ITC)

Refund of accumulated ITC on account of capital goods and input services:

The Council recommended amendment in clause (ii) of proviso to section 54(3) of the CGST Act, 2017, and in the CGST Rules, 2017, to provide for refund of accumulated ITC on account of capital goods in case of refund pertaining to zero-rate supplies, and of accumulated ITC on account of input services and capital goods in case of refund pertaining to inverted duty structure.

The Council recommended that the refund of accumulated ITC on input services for refunds pertaining to inverted duty structure shall be available in respect of ITC availed on input services on or after 1^st November, 2026.

In respect of refund of ITC on capital goods in refunds pertaining to zero rated supplies and inverted duty structure, the Council recommended that refund of ITC on capital goods will be spread over 60 months, and shall be available in respect of ITC availed on capital goods on or after 1^st April, 2027.  

This will ease working capital constraints for taxpayers and remove blockage of ITC on account of input services and capital goods in such cases. 

Rationalization of blocked ITC by amendment in section 17(5) of the CGST Act, 2017

The Council recommended amendment in section 17(5) of the CGST Act, 2017 to remove the restrictions on availment of ITC  inter-alia on the supplies of outdoor catering, health and life insurance, telecommunication towers, pipelines laid outside factory premises, free samples, goods destroyed or written off on expiry of shelf life as required by law. This will reduce the cascading of taxes and ensure a smoother flow of ITC across the supply chain.

Reforms relating to exports/zero rating of supplies of goods and services 

The GST Council recommended:

• omission of sub-clause (v) of clause (6) of section 2 of the IGST Act, 2017, so as to remove the condition of supplier and recipient of services not being establishments of a distinct person, under Explanation 1 to section 8 of the IGST Act, 2017, for a supply of services to qualify as an “export of services”. This will facilitate refunds for Indian services providers in respect of services supplied to/through their foreign offices/branches and thus will promote export of services from India.
• issuance of a circular to clarify various issues related to receipt of payment in foreign exchange or Indian rupees as permissible, for export of goods and services.
• omission of clause (a) of section 13(3) of IGST Act, 2017, so that the place of supply for services in cases where goods are made physically available by the recipient of services to the supplier, will be determined as per the default provision under section 13(2) of the IGST Act, 2017 i.e. the location of the recipient of such services. This will facilitate access to export-related benefits under GST for Indian service providers providing such services to foreign recipients.
• insertion of an explanation to section 16(1) of the IGST Act, 2017 to provide that in the cases where goods are supplied to an overseas buyer, but the delivery of goods is made to the said buyer in an SEZ/FTWZ, and the payment for such supply is received in convertible foreign exchange or in Indian Rupees wherever permitted by the RBI, then such a supply will be deemed to be supply of goods to an SEZ/FTWZ. This will provide certainty regarding zero rating benefit to Indian manufacturers making supply of goods for overseas buyers by making delivery to them in an SEZ/FTWZ for warehousing or further processing.