57th GST Council meet: Arrest powers, input-tax-credit reforms on Oct 7 agenda

The 57th GST Council is likely to consider a series of measures aimed at easing compliance and addressing long-standing industry concerns at its October 7 meeting, according to government sources.

One of the key issues likely to come up is the scope of arrest powers under the GST law. Senior officials aware of the discussions said that the government is considering significantly curtailing GST arrest powers, with enforcement expected to focus on major fraud and deliberate tax evasion.

"There have been ongoing consultations with industry and states. The feedback from businesses was that the government should rethink the arrest powers. This discussion is likely to be a part of the council meeting,” officials added.

If the proposal is cleared by the council, it will represent a significant change in GST enforcement, although any final decision would require the necessary legislative amendments, which will be proposed only after the council's clearance, said officials.

A key deterrent but also cause for concern

Manoj Mishra, Partner and Tax Controversy Management Leader, Grant Thornton Bharat, said, “The proposal to revisit arrest powers under GST is a significant step in recalibrating the enforcement architecture of the regime. Section 69 of the CGST Act empowers the Commissioner to authorise arrest, subject to the prescribed conditions, for specified offences such as fake invoicing and fraudulent availment or utilisation of ITC (input tax credit). This power has served an important deterrent function, particularly against organised tax fraud, but it also places a very significant coercive power within the hands of the tax administration.

“The proposed shift is, therefore, not simply about removing an arrest provision; rather it is about drawing a clearer institutional boundary between determination of tax liability and criminal enforcement. This would also be a meaningful departure from the approach adopted under GST, which carried forward criminal enforcement tools that existed under the earlier excise and service-tax framework.

“For businesses, the immediate benefit would be greater certainty during investigations and reduced apprehension where the underlying issue is interpretational or a bona-fide tax dispute. At the same time, the reform must preserve a strong and credible response to deliberate fraud, particularly fake invoicing and ITC fraud. Ultimately the right objective is more proportionate enforcement where tax disputes should be resolved through the tax framework, while deliberate economic fraud should face appropriate criminal consequences.”

Section 17(5) and input tax credit

The Council is also expected to deliberate on relaxing restrictions under Section 17(5) and widening the scope of input tax credit (ITC) for certain business-related expenses, claimed officials.

The proposal is likely to include allowing credit on certain expenses that are currently restricted, "potentially covering corporate life and health insurance benefits, telecom towers, pipelines, hiring of motor vehicles and outdoor catering, etc", officials added.

"Industry has been sending representations on these for quite some time, and the government has been examining the demands," officials shared as the reason behind the proposal under the GST council agenda.

Refunds for inverted duty structure

Another important issue to be considered by the council is the treatment of accumulated ITC arising from an inverted duty structure.

Officials shared that "sectors including pharmaceuticals, textiles, footwear, fertilisers, renewable energy and electric vehicles etc. are seeking changes to the refund mechanism, particularly for credit accumulated on account of input services and capital goods. This has been a pending demand since last year, post rate rationalisation and is likely to be considered by the council."

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Industry experts cited that allowing refunds attributable to input services and capital goods could release working capital currently locked in the GST system.

Experts suggest that once allowed, this will unlock a lot of working capital issues and bring in ease of doing business.

E-way bill checks may be streamlined

The Council may also consider reducing the compliance burden associated with e-way bill verification, including a proposal to limit routine checking by transit states and rely more heavily on intelligence-based verification, claimed officials in the know of the development.

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This would be aimed at reducing unnecessary stoppages of goods in transit while retaining enforcement powers where specific intelligence indicates potential tax evasion.

" The proposal is to allow the originating states and the destination states to have powers to stop goods and assess and inspect e-way bills and not allow transit states to do so. This too is proposed only under specific intelligence input to counter tax leakages and not lead to overreach by the administration," officials added.

Automation of GST processes

A series of process reforms are also expected to be a major focus of the October 7 GST Council meeting. Officials in the know of the development shared that the Council is expected to consider measures covering refunds, registration, input tax credits and penalties.

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" Among the proposals are automated approval of refunds, registration amendments and streamlining of cancellation of registration procedures based on clearance of risk-based analysis. The idea is that the compliant taxpayers potentially receive faster clearances while higher-risk cases remain subject to scrutiny," officials added.

Experts say that these are significant changes aimed at simplifying the GST system.

The council is meeting for the 57th time on October 7 in New Delhi, after over a year. And if it approves these proposals, it will ease a lot of hassles for businesses, be it small, medium or large.