The Goods and Services Tax Council, which meets this week, will seek to complete the GST reform process that started with a rate rationalisation last year by considering sweeping process reforms that include scrapping the provision that empowers tax officials to arrest alleged defaulters, people familiar with the matter said.
The move towards GST 2.0, as the government terms it, may also allow taxpayers to make changes or corrections directly in their sales statements to avoid disputes, introduce a single annual tax return for small consumer businesses, simplify the registration process with a three-day deadline, and use data analytics to automatically approve 90% of low-risk refund claims without requiring physical paperwork, the people added, asking not to be named.
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The second phase of reforming GST follows revenue stabilisation after last year’s rate rationalisation.
Another major objective of the 57th Council is to ensure stability in both GST rates and process reforms so that both businesses and consumers will have certainty, one person said. The 56th GST Council in September 2025 rationalised tax rates by reducing key slabs to two – 5% and 18% — and dismantling a complex multi-tiered rate structure of 5%, 12%, 18%, and 28%.
Now, process reforms will complete an overhaul of the GST regime, which will help the economy grow faster, this person added. Even minor rate tweaks may be considered only once a year, and the idea is to have these, if any, come into effect from April 1 of the following fiscal year, the person explained.
But the big process reform, arrived at after multiple rounds of stakeholder consultations, has to do with compliance and arrest, the people cited in the first instance said.
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With the advancement of technology such as data analytics, invoice matching between the buyer and the seller is instant, even before the supply takes place. Now smart enforcement has replaced the need for arrests to detect tax evasion or misappropriation of input tax credit (ITC), they said.
As a result, the council will consider a proposal to remove arrest provisions from the new generation GST or GST 2.0.
Under the proposal, tax disputes could be resolved through civil mechanisms such as tax recovery, interest payment and penalty, instead of arresting businessmen. The character of enforcement should change under GST 2.0, which reflects the maturity of the system rather than a lowering of guard, they said.
According to them, the law will take its own course for serious frauds of criminal nature through established agencies. Under the proposed revamp, prosecution may still remain available with a higher threshold of ₹5 crore, up from ₹1 crore, they said.
The proposed system would reserve the criminal process for cases whose scale warrants it, they said. It would, however, spare ordinary disputes related to classification, valuation and credit between GST authorities and businesses. According to them, a fine will be the norm rather than a sentence.
For small taxpayers, the council will consider a waiver of a late fee and penalties for ordinary lapses are expected to be rationalised, they said. The idea is to effect enforcement through fines rather than through custody.
It should be through a system that detects fraud rather than a provision that deters it so that honest business can deal with GST 2.0 with confidence, and enforcement efforts are made where the revenue is actually at risk, the people added.
Besides decriminalisation of the indirect tax regime, including removing the power of tax officials to arrest, the 57th GST Council may consider reforms that have been drafted after several meetings of all stakeholders, including the national coordination meetings of central and state officers between December last year and August this year. “Now the GST Council will examine them. Once approved by the Council, process reforms will be implemented in a staggered manner, depending on the practicality of implementation and ease for businesses,” he said.
The GST regime was introduced in July 2017, and GST 2.0 is the first major overhaul of the taxation system.
Key reforms proposed also include allowing taxpayers to make changes or corrections directly in their sales statements to avoid disputes, introducing a single annual tax return for small consumer businesses, simplifying the registration process with a three-day deadline, and using data analytics to automatically approve 90% of low-risk refund claims without requiring physical paperwork, according to another person.
Sectoral benefits
Although the 57th GST Council may not tinker with tax rates, several proposed process reforms and clarifications would remove ambiguities and thereby reduce tax burdens for various business segments and decrease disputes, the people mentioned above said.
For example, it is proposed to allow credit on inputs used in manufacturing free samples that will help several sectors, such as pharmaceutical and consumer goods, which often distribute free samples. In order to provide relief to agriculture and allied activities, clarifications are proposed on taxing seeds that are graded, treated and packed before they reach the farmer.
Similarly, clarifications are proposed on the tax-free nature of curing of coffee supplied to cultivators, lower levy on bio-stimulants used as fertiliser, a nil tax rate on psyllium seeds (isabgol) in all forms to protect small farmers, and a lower 5% tax on retreaded tractor tyres in line with the 56th GST Council meeting’s decision, the people said.
It is also proposed to exempt micro, small and medium enterprises (MSMEs) from compliance burdens by introducing a single annual return with quarterly payments, they said. This will save MSMEs up to ₹5 crore turnover the trouble of frequent filings for which they engage professionals; and it will also free them from exposure to notices for minor discrepancies. On average, about 1.685 million taxpayers report supplies made only to unregistered persons, and about 1.666 million of them, or 90%, have a turnover of up to ₹5 crore. This simplified arrangement may partially benefit that body of taxpayers, the people said.
In order to further facilitate exports through ease of GST processes, it is proposed to remove restrictions on availing export benefits to firms even if they route sales through their own overseas branches, perform job work on foreign-owned goods within the country, or try to recover tax locked up in capital investments such as plant, machinery, and services.
It is also proposed to encourage small businesses to take full advantage of expanding e-commerce. Currently, small online vendors are unable to reach national markets because of the need to register physical offices in every state where they operate, with multiple tax liabilities.
It is proposed to allow such online sellers to use the e-commerce platform’s warehouse as their local place of business. A seller can therefore reach customers nationwide on the strength of a single verified address, they said.
Similarly, for ease of logistics and warehousing, random border checks on trucks are proposed to be stopped. It is suggested to restrict checks at the state of origin on prior approved intelligence to save time and costs for businesses. It is also proposed to bring ease of process in the infrastructure, highways and real estate segment on the principle that if the toll itself bears no tax, the right to collect that toll cannot bear tax either.
The 57th Council meeting is expected to provide relief to automobiles and the mobility sector as well. It is proposed that businesses must not absorb heavy unrecoverable tax costs on employee transport fleets, and electric vehicle (EV) operators must not face unequal tax terms compared to conventional vehicles. Therefore, a full tax credit is proposed for EVs and business vehicles under 13 seats for purchase, insurance, and running costs.
To facilitate banking, insurance and other financial services, it is proposed to make employee insurance fully tax-recoverable and treat internal bank branch transfers as exempt activities. Similarly, for the hospitality, tourism and health sector, it is proposed that bookings by aggregators must not trigger double taxation on hotel rooms, and relaxations must be given on seven drugs related to rare diseases by allowing appropriate tax credits.
Experts view
Industry and experts said they expect the 57th GST Council meeting to make GST 2.0 full-proof by introducing a range of process reforms, particularly removing the power of tax officials to arrest businessmen even on suspicion, which not only kills entrepreneurship but also leads to the decline of that particular business establishment.
Recently, officials from a southern state visited Mumbai and arrested a CEO of a payment bank for a minor fault of one of its employees located in that state. The CEO had to face jail for months, and the business was hampered due to the overreach of officials.
Later, the matter was resolved without any criminality involved, the experts said, requesting anonymity and without naming the company.
MS Mani, partner at Deloitte India said: “While GST was considered an amalgalm of the erstwhile Central Excise and State VAT legislations, the introduction of Section 69 (of the CGST Act ) which gave a right to arrest for specified offences under Section 132 , was in conformity with the Central Excise legislation but a departure from the VAT legislation across states, which did not have any powers of arrest for violations of the VAT provisions.
Almost a decade after the introduction of GST, which has also been a period of significant business transformation, it does now appear that arrest provisions in a transaction tax legislation like GST are not only unnecessary but also impact the business climate, which now seeks more freedom from compliance and policing.
Many businesses have faced the harsh reality of arrest under the GST legislation, where potentially other avenues to investigate and determine a violation of GST provisions exist.
In certain circumstances, businesses have also been unduly penalised for offences committed by their business partners and vendors, despite their own compliance and tax payments being on track.
GST, as a transaction tax, has received wide acceptance from all businesses, as is evident from the growing GST collections every month, and the misdemeanour of very few taxpayers does not require blanket provisions such as Sec 69, which are applicable to all businesses.
Since the data of the entire GST value chain is available with the GSTN, they should be able to track and catch tax evaders and levy significant penalties which will act as a deterrence for the future.”