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

Author

Listed:
  • Arbind Modi

    (xKDR Forum)

  • Ajay Shah

    (xKDR Forum)

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.

Suggested Citation

  • Arbind Modi & Ajay Shah, 2025. "Input Tax Credit and refunds under GST in India: Conceptual and legal framework," Working Papers 44, xKDR.
    • Handle: RePEc:anf:wpaper:44
    as

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    File URL: https://papers.xkdr.org/papers/2025ModiShah_GST.pdf
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    References listed on IDEAS

    as
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    2. Michael Keen, 2014. "Targeting, cascading and indirect tax design," Indian Growth and Development Review, Emerald Group Publishing Limited, vol. 7(2), pages 181-201, November.
    3. Yongzheng Liu & Jie Mao, 2019. "How Do Tax Incentives Affect Investment and Productivity? Firm-Level Evidence from China," American Economic Journal: Economic Policy, American Economic Association, vol. 11(3), pages 261-291, August.
    4. Liu, Lihua & Cao, Lele & Cao, Yuqiang & Lu, Meiting & Shan, Yaowen, 2024. "VAT credit refunds and firm productivity: Evidence from China's VAT reform," International Review of Financial Analysis, Elsevier, vol. 93(C).
    Full references (including those not matched with items on IDEAS)

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    More about this item

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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