Input Tax Credit and refunds under GST in India: Conceptual and legal framework

Arbind Modi ()
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Arbind Modi: xKDR Forum

No 44, Working Papers from xKDR

Abstract: This paper examines the conceptual foundations and legal architecture of input tax credit (ITC) and refunds under India's Good and Services Tax (GST). It highlights how current design features have diluted the GST's character as a neutral, consumption-based value-added tax. While a well-functioning VAT hinges on seamless ITC across goods, services and capital goods, India's regime embeds on extensive restrictions, delayed credit flow, and narrowly circumscribed refund entitlements. These provisions create cascading, raise effective tax incidence, distort production and trade neutrality, and weaken the self-enforcing compliance mechanism intrinstic to the invoice-credit method. Comparative evidence from OECD and emerging economics shows that India's approach is unique in its own way, with refund design and blocked functioning as de facto taxes on investmenet and intermediate production. The paper argues that restoring neutrality requires full and immediate ITC, rationalized rates to reduce inversion, and automated refund administration. Such reforms are essential for reducing hidden cascading, improving competitiveness, and realigning India's GST with global best practice.

JEL-codes: H2 H20 H21 H77 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2025-12
New Economics Papers: this item is included in nep-pbe
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