Proposed changes to the goods and services tax (GST) refund mechanism and input tax credit (ITC) framework could ease working capital pressures on Indian businesses, but estimates of the potential liquidity gains vary significantly, depending on the scope of the reforms and the assumptions used.
While Nexdigm estimates that the expanded credit and refund framework could release Rs 50,000 crore to Rs 60,000 crore in annual liquidity once it reaches maturity, Trackase puts the working capital release from faster refunds alone at around Rs 25,000 crore to Rs 30,000 crore.
The proposed reforms seek to accelerate the processing of eligible refund claims and expand the scope of input tax credit available for refunds in specified cases. Exporters, manufacturers and businesses operating under an inverted duty structure could benefit from faster access to funds currently tied up in accumulated tax credits.
“The real significance of these reforms lies in converting accumulated tax credits into productive working capital and reducing the hidden financing cost of GST compliance,” said Prabhat Ranjan, senior director at Nexdigm.
The estimates, however, are not directly comparable. Nexdigm’s projection covers the broader impact of expanded credit and refund provisions, while Trackase’s calculation focuses on the working capital released when eligible refunds are paid faster. Neither figure represents an official government estimate.
Faster refunds could release blocked working capital
The GST Council, at its October 8 meeting, recommended a series of changes to the refund mechanism and input tax credit framework. These include risk based provisional sanction of 90% of eligible refund claims, changes to the calculation of refunds under the inverted duty structure and wider credit eligibility for specified input services and capital goods.
The Council also recommended reducing the period for acknowledging refund applications from 15 days to 10 days, with deemed acknowledgement where no response is issued within the prescribed period.
If implemented effectively, faster processing could help exporters and manufacturers access eligible refunds sooner, reducing the need to rely on short term borrowing to finance operations.
“For instance, an exporter with an eligible refund claim of Rs 10 crore could potentially access Rs 9 crore earlier, reducing dependence on short term borrowing,” Ranjan said.
Aditya Singhania, founder of Trackase, said the liquidity benefit should be calculated on the basis of the amount of eligible refunds and the time saved in receiving them, rather than the overall difference between gross and net GST collections.
In 2025 to 26, gross GST collections were about Rs 22.27 lakh crore against net revenue of about Rs 19.35 lakh crore. The difference of roughly Rs 2.9 lakh crore should not be treated as the amount of working capital that the proposed reforms would unlock.
“If 90 percent of a zero rated or inverted duty claim is sanctioned within 10 to 15 days instead of the 60 to 90 days that is common today, the permanent release is roughly the annual flow multiplied by 0.9 and by the days saved over 365,” Singhania said.
Based on an annual refund flow of Rs 1.8 lakh crore and 60 days saved, he estimated that the amount released from the blocked pool could be around Rs 25,000 crore to Rs 30,000 crore.
This calculation reflects the benefit of reducing the time eligible refunds remain outstanding. It is distinct from Nexdigm’s broader estimate, which includes the potential impact of wider credit and refund eligibility.
Inverted duty sectors, exporters among potential beneficiaries
Businesses operating under an inverted duty structure could be among the principal beneficiaries of the proposed changes. Such a structure arises when the GST rate on inputs is higher than the rate on finished products, leaving companies with accumulated credits that cannot be fully offset against their output tax liability.
Textiles, footwear, fertilisers, pharmaceuticals and renewable energy are among the sectors that could benefit, alongside export oriented manufacturers and micro, small and medium enterprises.
Ashish Kumar, head of Vayana GSP, said the measures could potentially unlock 3% to 5% of the GST amount for industry, describing this as an estimate rather than an official government projection.
“For example, a textile producer paying more GST on raw materials compared to finished goods may end up with credits that remain locked up. Faster refunds would allow it to direct funds towards inventory, wages, and supplier payments rather than depending on temporary loans,” Kumar said.
Rajat Mohan, managing partner at AMRG Global, said capital intensive sectors such as oil and gas, petrochemicals and telecom infrastructure could also benefit from the proposed changes.
Pharmaceutical and fast moving consumer goods companies could gain from proposed changes relating to input tax credit on free samples and goods destroyed or written off on expiry of shelf life where destruction is required by law, subject to applicable conditions.
Wider ITC eligibility could reduce tax costs
The proposed overhaul extends beyond refund timelines. The Council has recommended changes to allow refunds of accumulated input tax credit on specified input services and capital goods in eligible cases, potentially addressing long standing restrictions under the existing framework.
Under the recommendations, refunds of accumulated ITC on input services under the inverted duty structure would be available for credit availed on or after November 1, 2026.
For capital goods, the proposed changes would allow eligible ITC to be considered for refunds relating to zero rated supplies and the inverted duty structure for credit availed on or after April 1, 2027. The credit attributable to capital goods would be spread over 60 months rather than refunded entirely in the period in which it is availed.
Rahul Shekhar, partner, indirect tax at Nangia Global, said allowing input tax credit on employee health and life insurance could reduce the GST cost embedded in employee benefits, particularly for service sector companies where employee related expenses account for a significant share of operating costs.
Shekhar said the proposed eligibility of credit on free samples and inventory destroyed due to expiry, where destruction is mandated by law, could also provide relief to pharmaceutical and FMCG companies.
“The actual quantum of working capital unlocked would depend on the accumulated credit balances, refund eligibility and the speed of implementation,” Shekhar said.
For service exporters, the changes could improve the recovery of eligible taxes on business inputs. Singhania identified testing and certification laboratories, maintenance, repair and overhaul businesses, and clinical research organisations among the potential beneficiaries of changes relating to zero rated supplies.
Implementation will determine the actual gains
Tax experts cautioned that wider input tax credit eligibility and faster refund processing would not automatically translate into immediate cash for every business.
“The proposed 60 month refund mechanism for capital goods underscores this distinction. System driven risk classifications, reconciliation mismatches and restrictive interpretations could still delay the intended benefits,” Ranjan said.
Kumar said the eventual gains would depend on vendor compliance, GST portal readiness, accurate invoice reconciliation, effective risk assessment and clear eligibility rules.
Mohan said seamless integration among the GST Network, Customs, banking systems and state tax administrations would be critical, particularly for MSMEs that may have limited resources to resolve reconciliation issues or pursue delayed claims.
Parag Mehta, partner, indirect tax at N A Shah Associates LLP, said software companies, global capability centres, other service exporters and manufacturers with substantial exports could also benefit.
“There should be no implementation challenge if GSTN system is properly set up with proper checks and balances. Further it should be a fully automated process with no human interference which will ensure a smooth functioning,” Mehta said.
For CFOs, the key question is how quickly the proposed framework converts eligible tax credits into usable cash. The difference between the estimates reflects the distinction between the liquidity released by faster refunds and the broader potential benefit of expanding credit and refund eligibility. The actual outcome will depend on the final provisions, the credits businesses can claim and the consistency of implementation.
