GST reform urgency: India must mend a chain of input tax credit that’s holding its economy back

India’s goods and services tax (GST) still struggles with a basic design problem: the integrity of its input tax credit (ITC) chain. The recent rate rationalization simplified slabs, but its merger of the 12% category with the 5% slab largely applies to supplies where ITC is restricted or unavailable. In such cases, the system resembles cascading turnover-style taxation and weakens the value-added tax (VAT) principle of seamless credit and tax neutrality.

So, beyond rate adjustments, deeper structural issues remain. The proliferation of amendments and layered restrictions has made the law increasingly intricate and compromised ITC chain integrity. Without restoring credit neutrality, simplification of rates alone cannot make GST function as a true VAT.

The Union budget for 2026-27 offered an opportunity to complete this unfinished reform. Industry had expected rationalization of the ITC framework, which remains the most distortionary feature of the current system. That opportunity was missed.

The result is continued working- capital blockage, avoidable tax cascades and high compliance costs for businesses.A well-designed GST would be a destination-based consumption tax in which business-to-business transactions are tax-neutral. Taxes paid on inputs, input services and capital goods are fully creditable against output tax, ensuring that tax is levied only on the value added and never becomes a business burden. Preventing tax cascades across the value chain preserves competitiveness in both domestic and export markets.International experience shows that the strength of a GST lies less in its rate structure and more in the breadth of its base and integrity of its credit mechanism.