GST Council Meeting on October 7: Businesses Push for Easier Use of Tax Credits Across States

As preparations are underway for the Goods and Services Tax (GST) Council meeting scheduled for October 7, industry representatives have intensified their calls for a system enabling smoother utilization of tax credits across their business units in different states, according to four sources familiar with the matter.

Businesses are requesting the ability to offset the tax obligations of one state unit using the unused input tax credit (ITC) from another unit operating in a different state.

Current GST Framework and Its Challenges

Currently, under GST regulations, companies must register separately in each state where they operate. Each registration is treated independently for the purposes of maintaining and applying input tax credits. This often results in some states carrying unused tax credits while other states require GST payments in cash.

Input tax credit refers to the credit businesses earn for GST paid on goods and services used for commercial activities. This credit can offset the GST liability on sales, within certain restrictions.

For example, a company may hold ₹10 lakh in unutilized ITC under its GST registration in one state, yet be obligated to pay GST in cash for a project in another state. The current framework does not permit the transfer of these credits between different state registrations of the same company.

This restriction causes inefficiencies where substantial tax credits remain unused in one state while cash payments must be made in another.

Industry Proposals for Flexible Use of Tax Credits

Consequently, industry groups are advocating for more flexible use of these credits. Experts have proposed that initially, the government could allow the inter-state use of Central GST (CGST) and Integrated GST (IGST) credits, while excluding State GST (SGST), given the complexities related to individual states’ revenues and settlement mechanisms.

Abhishek Jain, Indirect Tax Head and Partner at KPMG, described such inter-state ITC utilization as a logical next step for CGST and IGST, which are central taxes. Jain noted that while SGST remains challenging due to its connection to state revenues, enabling the pooling of CGST and IGST credits across states would free up genuine working capital trapped within state-specific registrations without affecting state revenue shares.

He also pointed out that the government currently permits the transfer of cash balances between a company’s GST registrations sharing the same Permanent Account Number (PAN). Applying a similar principle to CGST and IGST credits could unlock working capital otherwise tied down in different state units.

Expert Insights on Industry Demands

Vivek Jalan, Partner at Tax Connect Advisory Services, highlighted that the ability to transfer ITC across state registrations has been a persistent demand, especially from sectors like works contracts. In such cases, contractors often receive mobilization advances requiring upfront GST payments, while accumulating ITC on subsequent purchases that cannot be utilized until the project finishes, which may take years.

Jalan explained that profit margins in these contracts can be lower than the tax paid on advances, leading to structural inefficiencies due to unutilized ITC. Allowing this credit to be transferred to other state registrations where projects are active or starting would help contractors better use their legitimate credits.

He suggested that even starting with the transfer of the CGST component alone could release nearly half of the stranded ITC, improving business cash flow, minimizing disputes, and boosting competitiveness.

Implementing these measures would be consistent with GST’s foundational goal of preventing tax cascading and would provide significant ease-of-doing-business improvements for taxpayers.

Summary of Industry Perspective

• Businesses have long sought the ability to transfer ITC across state registrations.
• Industry bodies emphasize transferring accumulated credits to registrations tied to ongoing projects.
• Such changes would align with GST’s core aim of eliminating cascading taxes.
• Experts recommend starting with cross-state use of CGST and IGST credits.