This post is published on behalf of Yajnavalkya ā Medium
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A GST terror story
Modi has announced during his Independence Day speech that he would be going for sweeping reforms of GST by Diwali. The central piece of the reform would be reducing the number of rates from 4 to 2. A lot of people – both experts and non-experts – have been advocating a single/dual rate regime as a magic bullet for the GST mess.
But is it? Let me start by narrating a GST horror story. Some GST basics first: GST is a value-added tax. Assuming a product has 10% tax, Manufacturer A sells the product to wholesaler B for Rs. 1000 (pre-tax). B pays A Rs.1000 + Rs. 100. B then sells the goods to Retailer C for Rs. 1050 (pre-tax) and C pays B Rs. 1050+Rs. 105. Now since B has already paid Rs. 100 as tax to A, he is required to deposit only Rs.5 to the exchequer. The Rs.100 that he paid the manufacturer is termed as ‘Input Tax Credit’ or ITC.
There are some elaborate ways of defrauding the system of taxes involving ITC which is also facilitated by loopholes in the tax filing process – discussing that would require a 5000-word post, so I will desist. But for those interested, you can read up about bill trading. One of the ways in which the system combats this menace which potentially causes trillions in tax losses, is Rule 86-A, which empowers the taxman to block ITC of any businessman if he has āreasonable causeā to believe that the ITC was fraudulently availed.
Ok, now on to the story. A few months back, a bunch of businessmen operating in the steel sector in my city – including one of my personal acquaintances – were slapped with notices under this rule, blocking ITC aggregating to Rs.60 million, for transactions related to the period 2021 to 2024. The stated reason – Supplier X from whom these people had purchased goods (and taken ITC credit) was declared to be “non-existent” and hence all those purchase transactions were fake. But here is the thing – the supplier was very much “existing” during the said period. There was concrete evidence of the same – power bills for the factory running into tens of millions, his GST filings, company annual returns, income tax returns and so on. The supplier had closed down his business in early 2025, not in small part due to the pain of GST terror and compliance burden. The panicked recipients of the notices went to meet the taxman, taking along the supplier and with all the aforementioned evidence. The taxman was unmoved. So next they moved to the court but the latter dismissed the petition asking them to exhaust the appeals process via the department first. Before filing an appeal, 20% of the blocked ITC needs to be deposited. The legal costs in this case would have added another couple of million Rupees. Having figured out that legal process was not worth the effort, the group sent a message to the taxman requesting a deal. Initial demand-Rs.12 million. After lots of hard bargaining, it was finally settled for Rs.8 million.. Continue reading GST reform – go big Modiji, let the bizmen breathe
