GST's credit challenge: Why input tax credit remains the biggest challenge
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.
Nearly a decade later, GST has largely succeeded in replacing multiple indirect taxes with a unified system. But one part of the reform continues to generate friction for businesses: input tax credit.
Today, ITC has become one of the biggest sources of litigation, working-capital blockage and compliance anxiety under GST. What was designed as a pass-through mechanism has evolved into a compliance-driven process where access to credit depends not only on a company’s own actions, but also on supplier behaviour, invoice matching and portal-based validations.
From seamless credit to conditional credit
Experts say GST succeeded in reducing embedded taxation but the architecture of claiming credit has changed significantly.
Swaroop Repaka, head of product at ClearTax, told Business Standard that the original design worked on a different principle. “The original promise of input tax credit (ITC) was simple and powerful: kill the cascading of tax and let credit flow seamlessly across the chain. On the first count, GST has genuinely delivered; the embedded-tax problem of the old VAT + service tax + excise era is largely gone.”
However, he said, the ITC mechanism has quietly changed character. "We've moved from a self-assessed, trust-based model to a verification-based, supplier-dependent one," he said.
Over time, 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.
Nitin Vijaivergia, partner at Price Waterhouse & Co LLP, told Business Standard, “GST was envisioned as a seamless credit-based tax, eliminating cascading and taxing only value addition. While it has largely delivered on these objectives, the architecture of input tax credit has evolved from a seamless tax mechanism into a conditional entitlement.”
“Today, input tax credit is available not merely because tax has been paid, but only when every link in the compliance chain performs flawlessly," he said.
