Ahead of the GST Council meeting on October 7, businesses want permission to settle reverse charge mechanism (RCM) tax using input tax credit (ITC) balances instead of paying cash first and claiming refunds later.
Businesses request that ITC balances in electronic credit ledgers be permitted to discharge RCM tax liabilities directly.
Paying RCM tax in cash before claiming credit strains working capital and has led to accumulated unused ITC, especially after recent rate cuts.
Sectors most affected include FMCG, pharmaceuticals, footwear and automobiles, where large capital expenditure and rate changes created inverted-duty situations.
Industry groups have asked the GST Council, which meets on October 7, to allow taxpayers to use available input tax credit (ITC) to pay taxes that arise under the reverse charge mechanism (RCM). Under current practice, buyers who are liable to pay RCM generally must deposit tax in cash and then claim the corresponding credit, which keeps cash tied up until the credit is processed.
Why this matters for working capital
ITC represents GST already paid on purchases that businesses can offset against output tax liability. When RCM applies, however, many taxpayers cannot use their accumulated ITC to discharge the RCM liability directly. The result is a working capital burden: businesses pay tax out of cash and watch an unutilized ITC balance grow in their electronic credit ledger.
The request is most acute in sectors that made large capital investments and then faced rate reductions under recent GST adjustments (referred to here as GST 2.0). The sectors identified in the reporting are FMCG, pharmaceuticals, footwear and automobiles. These sectors report significant accumulated credits and limited ability to use them against RCM liabilities, producing an inverted-duty effect for certain supplies.
Industry wants the Council to permit the use of ITC balances to settle RCM liabilities across the board. They argue this would unlock capital tied in credit ledgers and reduce the cash flow burden on businesses. A narrower proposal—reducing the GST rate on structurally inverted reverse-charge supplies—has also been mentioned as an alternative for cases where inversion is structural.
Background on RCM and ITC interaction
Allowing ITC utilisation for RCM payments would directly reduce cash outflow for affected taxpayers and could lower the incidence of large, unused credit balances. Industries argue the change would make GST administration more taxpayer-friendly and help free up funds for operations and investment.
The issue will be before the GST Council at its October 7 meeting, where other ITC relief measures and process reforms are also on the agenda. Related items being discussed at the same meeting include invoice-matching reforms, ITC process changes and possible reliefs recommended by the Council's law committee.
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