Navigating the Next Generation of GST: A Comprehensive Analysis of India's Tax Reforms Effective October 2025
- Nikhil hirani
- Oct 3
- 24 min read
By Nikhil Jain, TAXPATH INDIA FOUNDER
INDEX
The Paradigm Shift
The Indian Goods and Services Tax (GST) framework is poised for its most significant evolution since its inception. Effective October 1, 2025, a series of transformative reforms, spearheaded by the Central Board of Indirect Taxes and Customs (CBIC) through key notifications such as Notification No. 16/2025–Central Tax, will fundamentally alter the landscape of GST compliance. This marks a definitive paradigm shift in compliance philosophy, moving from a system largely reliant on "auto-population" and trust-based filing to a stringent "verification-first" model. This change is not merely procedural; it represents a strategic pivot towards embedding greater accountability, enhancing transparency, and pre-emptively plugging tax leakages that have persisted in the system.
Core Components of the Reform
This comprehensive transformation is built upon three foundational pillars that will reshape how businesses interact with the GST ecosystem:
The Invoice Management System (IMS): The mandatory introduction of the IMS serves as the new, singular gateway for managing inward supplies and claiming Input Tax Credit (ITC). It transforms the ITC claim process from a passive acceptance of system-generated data to an active, document-level verification and confirmation process.
Procedural Overhaul of GSTR-2B and GSTR-3B: The reforms fundamentally redefine the nature and generation of key returns. The GSTR-2B will cease to be an "auto-generated statement" and will instead be a record generated based on the taxpayer's explicit actions within the IMS. Consequently, the auto-population of ITC from GSTR-2B into the summary return, GSTR-3B, will be discontinued, mandating manual entry of verified credit.
"Next-Generation GST" Framework: These procedural changes are implemented within the broader context of "Next-Generation GST" reforms. This includes a landmark rationalization of GST rates, the introduction of new exemptions, and other trade facilitation measures designed to simplify the tax structure and reduce the overall tax burden on consumers and key industries.
Strategic Intent
These reforms should be viewed not as isolated procedural adjustments but as a deliberate and cohesive government strategy to mature the GST ecosystem. The strategic intent is twofold: first, to leverage technology to reduce litigation by minimizing errors and mismatches at the source; and second, to align the legal provisions of the GST Acts with the enhanced practical capabilities of the Goods and Services Tax Network (GSTN) portal. By forcing a more disciplined and transparent compliance cycle, the government aims to create a more robust, resilient, and revenue-efficient indirect tax regime.
The Core Transformation: Overhauling the GST Return Filing Mechanism
The Rationale for Change
The impetus behind this monumental shift stems from the inherent vulnerabilities of the previous return filing system. The mechanism of auto-populating GSTR-3B directly from GSTR-2B, while designed for convenience, created significant risks. It was susceptible to inadvertent errors, mismatched ITC claims between suppliers and recipients, and, in some cases, fraudulent claims based on invoices without an underlying supply of goods or services. The government recognized that a passive verification system was insufficient to ensure the integrity of the ITC chain. The new framework is designed to address these systemic weaknesses by mandating active, invoice-level verification by the taxpayer before any credit can be claimed, thereby shifting the responsibility of accuracy squarely onto the recipient.
The Old vs. New Process: A Comparative Analysis
The change in the return filing workflow is profound. To understand its full impact, a side-by-side comparison of the process before and after October 1, 2025, is essential.
Process Before October 1, 2025 (The Auto-Population Era): The compliance cycle was largely automated. A supplier would file their statement of outward supplies in Form GSTR-1. Based on this data, the GSTN would automatically generate a dynamic statement, GSTR-2A, and a static monthly ITC statement, GSTR-2B, for the recipient. The system would then auto-populate the eligible ITC from GSTR-2B into Table 4 of the recipient's GSTR-3B. The taxpayer's primary role was to review this pre-filled data and make corrections if necessary. The onus was on the taxpayer to disprove the system's calculation.
Process From October 1, 2025 (The Verification-First Era): The new process mandates active taxpayer intervention at its core. While suppliers continue to file GSTR-1, the data no longer flows directly into a finalized GSTR-2B. Instead, the invoices appear in the recipient's new Invoice Management System (IMS) dashboard. The recipient must then manually review each document and take a definitive action: Accept, Reject, or Pend. Only after these actions are completed can the taxpayer generate their GSTR-2B, which will now contain only the accepted invoices. Finally, the taxpayer must manually enter the total eligible ITC from this newly generated GSTR-2B into their GSTR-3B. The onus has shifted entirely to the taxpayer to prove and build their ITC claim from the ground up.
This new system fundamentally alters the nature of compliance risk. Previously, disputes with suppliers or incorrect invoices were often post-filing reconciliation issues. Now, they are pre-filing roadblocks. Any failure to diligently reconcile invoices within the IMS in a timely manner directly impacts the ability to generate GSTR-2B, file GSTR-3B, and claim legitimate ITC. This creates significant potential for cash flow disruptions, as the risk of delayed credit and any associated interest or penalty liability now rests squarely on the recipient's pre-filing diligence—a major escalation of responsibility.
Key Legislative Underpinnings
This procedural transformation is anchored in critical amendments to the Central Goods and Services Tax (CGST) Act, 2017. The most crucial change is to Section 38, which governs the communication of details of inward supplies. The amendment replaces the term "Auto Generated Statement" with simply a "statement". This seemingly minor semantic change provides the legal foundation for converting GSTR-2B from a system-pushed document into a taxpayer-pulled document, generated only after manual confirmation in the IMS.
Furthermore, an amendment to Section 39(1) introduces a "hard lock" that enforces this new workflow. It mandates that a taxpayer cannot file their GSTR-3B for a tax period until the GSTR-2B for that same period has been generated. This creates an unbreakable sequential dependency: action in IMS is required to generate GSTR-2B, and generation of GSTR-2B is required to file GSTR-3B.
Feature | Old Process (Until Sept 30, 2025) | New Process (From Oct 1, 2025) | Key Implication |
GSTR-2B Generation | Automatically generated by the GSTN based on suppliers' GSTR-1 filings. | Manually generated by the taxpayer after taking action (Accept/Reject/Pend) on invoices in the Invoice Management System (IMS). | Taxpayer actively constructs their GSTR-2B; it is no longer a passive statement. |
Taxpayer Action Required | Passive review and reconciliation of auto-populated data. | Active, invoice-level verification and action (Accept/Reject/Pend) in the IMS is mandatory. | Compliance becomes a proactive, pre-filing activity, not a post-filing reconciliation. |
ITC Population in GSTR-3B | ITC from GSTR-2B was auto-populated into Table 4 of GSTR-3B. | Auto-population is discontinued. Taxpayer must manually enter the eligible ITC from the IMS-generated GSTR-2B. | Increased manual effort but ensures that only verified ITC is claimed, reducing errors. |
Basis of ITC Claim | Based on a system-generated statement (GSTR-2B) which was "deemed" correct unless challenged. | Based on invoices explicitly accepted by the taxpayer in the IMS. | The legal basis for the ITC claim is now the taxpayer's own explicit acceptance of an invoice. |
GSTR-3B Filing Dependency | GSTR-3B could be filed independently, though reconciliation with GSTR-2B was advised. | Filing of GSTR-3B is blocked until GSTR-2B for the corresponding tax period is generated. | Creates a rigid, sequential compliance process that cannot be bypassed. |
Deep Dive into the Invoice Management System (IMS)
Architecture and Objectives
The Invoice Management System (IMS) is the technological cornerstone of the new GST compliance framework. It is a dedicated dashboard within the GST portal designed to be the central hub for managing all inward supplies, including B2B invoices, credit notes, and debit notes. Its primary objective is to function as a mandatory communication and verification platform between suppliers and recipients. It ensures that no ITC is claimed before the underlying document has been reviewed and explicitly or implicitly acknowledged by the recipient, thereby strengthening the integrity of the entire tax credit chain.
A Step-by-Step Workflow for Taxpayers
The workflow within the IMS is designed to be sequential and intuitive:
Supplier Action: The process begins when a supplier saves or files their invoices in their GSTR-1 or, for QRMP taxpayers, in the Invoice Furnishing Facility (IFF).
Real-time Reflection: As soon as a supplier saves a document, it appears in near real-time on the recipient's IMS dashboard. This provides immediate visibility of all inward supplies being reported against the recipient's GSTIN.
Recipient Action: The recipient's tax compliance team must log into the GST portal, navigate to the IMS dashboard, and systematically review each document reported by their suppliers.
Taking Action: For each document, the recipient must choose one of three core actions before they can proceed to file their GSTR-3B for the period.
The Three Core Actions Explained
The IMS provides taxpayers with a clear set of actions to manage their inward supplies:
Accept: This action signifies that the recipient confirms the invoice is accurate and pertains to a legitimate supply received. Accepted invoices become part of the 'ITC Available' section in the subsequently generated GSTR-2B and form the basis of the ITC claim in GSTR-3B.
Reject: This action is used to dispute an invoice. Common reasons for rejection include an incorrect GSTIN, duplicate invoicing, incorrect tax amounts, or the invoice not belonging to the recipient at all. A rejected invoice is excluded from the GSTR-2B, and no ITC can be claimed on it. Crucially, the rejection status is communicated back to the supplier via their own dashboard, prompting them to make necessary corrections in their subsequent GSTR-1 filing.
Pend: This action allows the recipient to defer a decision on an invoice to the next tax period. This is typically used for documents that require clarification from the supplier, such as a mismatch in the quantity of goods received versus the quantity invoiced. A pended invoice is not included in the current month's GSTR-2B, and the ITC is deferred until the issue is resolved and the invoice is accepted in a future period.
The "Deemed Accepted" Principle
A critical, and potentially high-risk, feature of the IMS is the principle of "deemed acceptance." If a recipient fails to take any action (Accept, Reject, or Pend) on an invoice visible in their IMS dashboard by the time they file their GSTR-3B, the system will automatically treat that invoice as "deemed accepted". This invoice will then flow into the GSTR-2B as eligible ITC. While this acts as a failsafe to prevent taxpayers from being unable to file their returns due to inaction, it poses a significant risk. A negligent taxpayer could inadvertently accept incorrect or fraudulent invoices, leading to improper ITC claims and subsequent departmental scrutiny, demands, and penalties.
Advanced Features (per GSTN Advisory 624)
Recognizing the need for greater flexibility in complex business scenarios, the GSTN, through Advisory No. 624 dated September 23, 2025, introduced several enhancements to the IMS, effective from the October 2025 tax period.
Limited 'Pending' Action for Specific Records: The ability to keep a document in 'Pending' status indefinitely is restricted. For certain specified records, such as credit notes or downward amendments to invoices that have already been accepted, the 'Pending' action is now limited to one tax period only (one month for monthly filers and one quarter for quarterly filers). This forces a timely resolution of such items.
Declaring Partial ITC Reversal: A crucial new facility allows taxpayers to declare the exact amount of ITC that was availed and needs to be reversed in relation to a specific document, like a credit note. Previously, the system might have assumed a full reversal. This feature is particularly useful if only partial ITC was initially claimed or if the reversal was already accounted for in the books. It brings precision to the reversal process and reduces disputes.
Optional 'Remarks' Feature: Taxpayers now have the option to add remarks or comments when they 'Reject' or 'Pend' an invoice. These remarks are visible to the supplier on their dashboard. This feature is designed to improve communication, allowing the recipient to specify the exact reason for the rejection (e.g., "Incorrect HSN code used" or "Invoice amount does not match PO"), thereby enabling the supplier to make corrections more quickly and efficiently.
The introduction of the IMS is more than a mere compliance update; it acts as a powerful catalyst for the digital transformation of the entire procure-to-pay cycle within businesses. The tight timelines for taking action and the significant financial risk associated with the "deemed accepted" principle make traditional, manual, and paper-based reconciliation processes practically untenable, especially for businesses with a high volume of transactions. This systemic pressure will compel organizations to invest in and adopt accounting software (such as Tally, SAP, or Oracle) that offers deep integration with the GSTN's IMS APIs. Such integration allows for the automated matching of invoices in the IMS against internal records like purchase orders and goods receipt notes, flagging discrepancies in real-time. Consequently, this will also necessitate a re-evaluation of vendor relationships, pushing businesses to establish stricter Service Level Agreements (SLAs) with their suppliers that mandate timely and accurate invoicing, transforming vendor management from a purely transactional function into a critical, compliance-centric partnership.
Action | Description | Impact on GSTR-2B | Impact on Supplier | Strategic Use Case |
Accept | The recipient confirms the invoice is correct and valid. | The invoice is included in the 'ITC Available' section. | The transaction is considered closed from a compliance perspective. | For all routine, accurate invoices that match purchase records. This is the default action for smooth ITC claims. |
Reject | The recipient disputes the invoice due to errors (e.g., wrong amount, duplicate). | The invoice is excluded from the 'ITC Available' section. ITC cannot be claimed. | The supplier is notified of the rejection and the reason (if remarks are added), prompting them to issue a corrected invoice or amendment. | To immediately flag and remove incorrect or fraudulent invoices from the ITC chain, preventing wrongful claims. |
Pend | The recipient defers the decision on the invoice to the next tax period. | The invoice is excluded from the current period's GSTR-2B. ITC claim is deferred. | The supplier is aware that the invoice is under review, encouraging communication to resolve the issue. | For invoices with minor discrepancies (e.g., quantity mismatch) that require clarification before acceptance. |
No Action (Deemed Accepted) | The recipient takes no action on the invoice before filing GSTR-3B. | The invoice is automatically treated as accepted and included in the 'ITC Available' section. | The supplier's invoice is considered valid by the system. | A high-risk default. Should be avoided. It acts as a system failsafe but exposes the recipient to the risk of claiming incorrect ITC. |
The Ripple Effect: How IMS Redefines GSTR-2B and GSTR-3B
GSTR-2B: From 'Auto-Generated' to 'IMS-Generated' Record
The most fundamental change is in the very nature of Form GSTR-2B. It is no longer a passive, "auto-generated" statement pushed out by the GSTN. Instead, it has become an active, on-demand report that is generated by the taxpayer based on their explicit actions within the Invoice Management System. The eligibility of ITC for a given tax period is now locked in based on these actions. This makes GSTR-2B a definitive, taxpayer-verified record of eligible credit, aligning the legal provisions with the practical functionality of the portal.
GSTR-3B: The End of Auto-Population and the New Manual Process
The direct consequence of the changes to GSTR-2B is the complete discontinuation of the auto-population of ITC into Form GSTR-3B. The convenience of having Table 4(A) (ITC Available) pre-filled is now a thing of the past. Taxpayers must adopt a new, more deliberate, and manual filing process.
The new step-by-step process for claiming ITC in GSTR-3B is as follows:
Finalize Actions in IMS: The first and most critical step is for the taxpayer to complete their review of all inward supply documents in the IMS dashboard and take the appropriate action—Accept, Reject, or Pend—for each one.
Generate Final GSTR-2B: Once all actions are finalized for the period, the taxpayer must generate their GSTR-2B. This statement will now reflect only the ITC from the invoices that were 'Accepted' or 'Deemed Accepted'.
Manually Transcribe ITC: The taxpayer must then take the consolidated figure of eligible ITC (IGST, CGST, SGST/UTGST) from this newly generated GSTR-2B and manually enter it into the relevant fields of Table 4 in their GSTR-3B.
File GSTR-3B: After entering the ITC details, the taxpayer can proceed with the rest of the GSTR-3B filing process, which includes declaring outward tax liability, offsetting the liability with the claimed ITC and cash balance, and finally submitting the return.
The Critical Dependency
This new process is enforced by the unbreakable compliance chain established by the amended GST law. As per the amendment to Section 39, the GST portal will not permit the filing of Form GSTR-3B for a tax period unless Form GSTR-2B for that same period has been generated. This sequential dependency ensures that no taxpayer can bypass the crucial step of invoice verification in the IMS.
A Practical Walkthrough
To illustrate the new process, consider the following example:
Scenario: 'ABC Corp', a manufacturing company, receives 100 invoices from its various suppliers during the month of October 2025.
Step 1 (Action in IMS): Before the due date for filing its October GSTR-3B, ABC's accountant logs into the IMS. They meticulously review all 100 invoices against their internal purchase records.
They 'Accept' 95 invoices that are perfectly correct.
They 'Reject' 2 invoices that are duplicates of already received invoices.
They 'Pending' 3 invoices where the quantity of goods mentioned does not match the goods received note, adding remarks for the supplier to clarify.
Step 2 (Generation of GSTR-2B): After completing these actions, ABC Corp generates its GSTR-2B for October 2025. This statement now contains the ITC details corresponding to only the 95 accepted invoices.
Step 3 (Manual Entry in GSTR-3B): The accountant then prepares the GSTR-3B for October. They manually enter the total IGST, CGST, and SGST amounts from the generated GSTR-2B into Table 4 of the GSTR-3B. The ITC related to the 2 rejected and 3 pended invoices is not claimed in this month.
Step 4 (Follow-up and Future Claim): The suppliers of the rejected and pended invoices are automatically notified. They issue corrected documents which then appear in ABC Corp's IMS dashboard for November. Once verified and accepted in November, the ITC for these invoices can be claimed in the GSTR-3B for November.
This new sequential dependency (IMS → GSTR-2B → GSTR-3B) introduces a new potential bottleneck into the compliance cycle. Previously, disputes with suppliers over invoice details were primarily a reconciliation issue that could be handled separately. Now, such disputes have the power to delay the entire GSTR-3B filing process. The filing of GSTR-3B is the mechanism for paying the month's output tax liability. If a business is hesitant to generate its GSTR-2B and file GSTR-3B because a significant portion of high-value invoices are under dispute (and thus in 'Pending' status), it could lead to a substantial reduction in claimable ITC for the month. This might necessitate a large cash outflow to settle the tax liability. Any delay in resolving these disputes that pushes the GSTR-3B filing past its due date will automatically trigger late filing fees and, more critically, interest payable on the gross tax liability.
Broader "Next-Gen" GST Reforms: Context and Impact
The overhaul of the return filing mechanism is the procedural core of a much broader set of "Next-Generation" GST reforms. These reforms, largely effective from September 22, 2025, aim to simplify the tax structure, reduce the burden on consumers and businesses, and promote economic growth.
The Great Rate Rationalization
The most significant of these reforms is a landmark rationalization of the GST rate structure, designed to make the system more transparent and less complex.
Shift to a Two-Slab System: The reform abolishes the 12% and 28% tax slabs. The vast majority of goods and services previously under these slabs have been consolidated into either the 5% (Merit Rate) slab, primarily for essentials, or the 18% (Standard Rate) slab, for most other goods and services.
Introduction of a 40% De-merit Rate: A new, higher tax bracket of 40% has been introduced for luxury items and "sin" goods. This category includes products like tobacco, pan masala, aerated beverages, high-end luxury cars, yachts, and private aircraft. This ensures that while the tax on common-use items is reduced, revenue neutrality is maintained by taxing de-merit goods at a higher rate.
Abolition of Compensation Cess: In a major simplification measure, the long-standing Compensation Cess, which was levied on certain goods over and above the GST rate, was abolished effective September 22, 2025. This simplifies tax calculations and reduces the final price for goods like motor vehicles and caffeinated beverages.
Key Exemptions and Relief Measures
Alongside rate rationalization, the government has introduced several relief measures targeting specific sectors and taxpayer categories:
Insurance Sector: In a move aimed at boosting insurance penetration and providing social security, a complete GST exemption has been granted on premiums for individual life insurance and health insurance policies. These were previously taxed at 18%.
Small Taxpayers: To reduce the compliance burden on small businesses, taxpayers with an aggregate annual turnover of less than ₹2 crore are now exempt from the mandatory filing of the annual return (Form GSTR-9) from the financial year 2024-25 onwards.
Sector-Specific Relief: Various sectors have received targeted relief. The GST rate on handicrafts has been reduced from 12% to 5% to support artisans. A uniform rate of 12% has been applied to key construction materials like bricks and tiles, bringing clarity to the real estate sector. Additionally, rates on agricultural machinery, certain medical devices, and hotel accommodation (for tariffs up to ₹7,500 per day) have been significantly reduced.
The government's simultaneous implementation of stricter compliance procedures and a simplified, more taxpayer-friendly rate structure reveals a sophisticated dual strategy. The procedural changes, centered around the IMS and manual return filing, act as the "stick." They are designed to enforce stricter discipline, enhance transparency, and plug revenue leakages by making non-compliance and tax evasion significantly harder. At the same time, the sweeping rate rationalization, new exemptions for crucial sectors like insurance, and compliance relief for small businesses act as the "carrot." These measures sweeten the deal by reducing the direct tax burden and simplifying the overall tax structure, making compliance easier and more affordable for the majority of taxpayers. This balanced "carrot and stick" approach aims to foster a culture of voluntary compliance through simplification and fairness, while simultaneously using technology to build robust guardrails against non-compliance, thereby creating a more sustainable and efficient tax regime.
Category/Product | Old GST Rate (%) | New GST Rate (%) | Impact on Sector/Consumer |
Daily Essentials (e.g., soap, toothpaste, hair oil) | 18 | 5 | Reduces monthly household expenditure and boosts consumption. |
Consumer Durables (e.g., TVs, ACs, dishwashers) | 28 | 18 | Makes white goods more affordable for the middle class. |
Small Cars & Two-Wheelers (≤350cc) | 28 | 18 | Lowers the cost of personal mobility, stimulating the auto sector. |
Cement | 28 | 18 | Reduces construction costs, providing a fillip to infrastructure and real estate. |
Hotel Stays (up to ₹7,500/day) | 12 | 5 | Makes travel and tourism more affordable, boosting the hospitality industry. |
Handicrafts | 12 | 5 | Supports artisans and the labor-intensive handicraft sector. |
Luxury Cars & High-end Vehicles | 28 (+ Cess) | 40 | Increases the cost of luxury goods, ensuring progressive taxation. |
Aerated Drinks & Tobacco | 28 (+ Cess) | 40 | Discourages consumption of "sin" goods through higher taxation. |
Key Legal and Structural Amendments
Beyond the headline changes in rates and return filing, the Finance Act, 2025, introduced several critical legal and structural amendments that have far-reaching implications for taxpayers.
Retrospective Amendment on ITC (Section 17(5)): Overriding the Safari Retreats Judgment
One of the most contentious changes is the amendment to Section 17(5) of the CGST Act, which deals with blocked credit. This amendment, notified to be effective from October 1, 2025, has been given retrospective effect from July 1, 2017. It explicitly clarifies that Input Tax Credit is not available for goods or services used for the construction of an immovable property (other than plant and machinery) on one's own account, even if such property is used in the course or furtherance of business.
This amendment was specifically introduced to legislatively override the judicial interpretation established by the Supreme Court in the case of Safari Retreats. The Court had applied a "functionality test," ruling that if a building (like a shopping mall) was constructed to be leased out, its construction was essential for providing the output service of leasing, and thus the building itself could be considered 'plant', making the ITC on its construction eligible. The retrospective amendment negates this interpretation entirely. This move is expected to trigger a new wave of litigation, as tax authorities may initiate recovery proceedings against taxpayers who had claimed ITC based on the favorable court rulings.
New Conditions for Credit Notes (Section 34(2))
The amendment to Section 34(2) addresses a significant revenue leakage loophole related to credit notes. The new provision mandates that a supplier can reduce their output tax liability in respect of a credit note only if the recipient of the supply has reversed the corresponding Input Tax Credit. Previously, a supplier could reduce their liability in their GSTR-1 by issuing a credit note, irrespective of whether the recipient had reversed the ITC in their GSTR-3B. This created a situation where the government lost revenue from both ends. The new rule ensures that the reduction in the supplier's liability is perfectly synced with the reversal of credit by the recipient, making the process watertight.
Operationalization of the GST Appellate Tribunal (GSTAT)
In a landmark development for the GST dispute resolution mechanism, the Goods and Services Tax Appellate Tribunal (GSTAT) was officially launched in September 2025. This has been a long-standing demand of the industry to create a specialized second-tier appellate authority for GST matters. Key features of the GSTAT include:
Balanced Composition: Each bench will comprise two Judicial Members and two Technical Members (one from the Centre and one from the State), ensuring a balanced perspective on legal and technical aspects of disputes.
Digital-First Approach: A new GSTAT e-Courts Portal has been launched to facilitate the online filing of appeals, tracking of cases, and participation in digital hearings, promoting transparency and efficiency.
Staggered Filing for Backlog: To manage the transition smoothly, a staggered timeline has been provided for filing appeals against past orders, with the final deadline for backlog appeals set as June 30, 2026.
The operationalization of GSTAT is expected to significantly reduce the burden on High Courts, which are currently flooded with GST writ petitions, and provide taxpayers with a faster, more accessible, and specialized forum for justice.
These legal amendments, particularly the retrospective action on Section 17(5), reveal a clear strategic intent from the government to assert legislative supremacy in tax policy and curtail the scope for judicial interpretations that deviate from the executive's original intent. By amending the law itself to nullify a Supreme Court ruling, the government is signaling a preference for legislative certainty over judicial discretion. This approach, combined with the simultaneous launch of a structured and specialized appellate body like GSTAT, points to a two-pronged strategy: first, to proactively eliminate ambiguities in the law through direct legislation to prevent future disputes, and second, to channel all existing and future disputes through a specialized tribunal system. The broader implication is a deliberate shift towards a tax regime where the law is intended to be explicit and less open to interpretation, which, while providing clarity, may also limit the avenues for legal challenges on nuanced points of law.
Strategic Implications and Preparedness for Businesses
The sweeping reforms effective from October 2025 will have profound strategic implications for businesses, necessitating immediate action to adapt their processes, systems, and vendor relationships.
Impact on Compliance and Operations
Increased Workload and Costs: The transition from an automated to a manual, verification-intensive return filing process will inevitably increase the compliance workload. Businesses, especially those with a high volume of transactions, will need to dedicate significant time and resources to the monthly reconciliation of invoices in the IMS. This is likely to translate into higher compliance costs, either through the need for additional in-house staff or increased fees for tax consultants.
Vendor Management as a Critical Function: The new system inextricably links a business's ability to claim ITC to the compliance discipline of its vendors. A supplier's delay in filing GSTR-1 or errors in their invoices will now have a direct and immediate adverse impact on the recipient's ITC claim for the month. This elevates vendor management from an operational task to a critical compliance function. Businesses will need to implement robust vendor communication protocols, conduct regular vendor compliance assessments, and potentially amend commercial agreements to include clauses penalizing non-compliance.
Working Capital Impact: The risk of delayed or deferred ITC claims poses a direct threat to a company's working capital. If a significant portion of ITC is locked up due to unresolved invoice discrepancies in the IMS, the business will have to fund its output tax liability from its cash reserves. This can strain liquidity, particularly for small and medium-sized enterprises (SMEs) operating on thin margins.
Actionable Checklist for Businesses
To navigate this new landscape successfully, businesses must undertake a series of proactive measures:
Update ERP and Accounting Software: This is the most urgent and critical step. Businesses must ensure their accounting software (e.g., Tally, SAP, Oracle) and ERP systems are updated to handle the revised GST rates and, more importantly, to integrate seamlessly with the new IMS functionalities through APIs. This will enable automated reconciliation and reduce the burden of manual verification.
Train Accounting and Finance Teams: Comprehensive training must be provided to all staff involved in the procure-to-pay and tax compliance processes. They need to understand the new IMS workflow, the specific implications of the 'Accept', 'Reject', and 'Pend' actions, and the new manual procedure for filing GSTR-3B.
Revise Standard Operating Procedures (SOPs): Internal SOPs for procurement, invoice processing, and vendor payments must be fundamentally revised. A key change should be to make the successful reconciliation of an invoice in the IMS a mandatory prerequisite before releasing payment to the vendor.
Enhance Vendor Communication Channels: Businesses should proactively communicate the new requirements to all their suppliers. It is crucial to establish clear, documented protocols for handling rejected or pended invoices to ensure that corrections are made swiftly and do not disrupt the ITC claim cycle.
Conduct a Retrospective ITC Review: Businesses in the real estate, construction, and infrastructure sectors must conduct an immediate and thorough review of their ITC claims made since July 1, 2017, on the construction of immovable property. In light of the retrospective amendment to Section 17(5), they need to assess their potential liability and prepare for possible departmental inquiries.
The Road Ahead: An Expert Analysis
These reforms are not an end in themselves but a significant milestone on the path towards the ultimate vision for the GST regime: the "hardlocking" of GST returns. This concept refers to a future state where the GST system will enforce a near-perfect, three-way match between a taxpayer's declared outward supplies (GSTR-1), their verified inward supplies and ITC (IMS-generated GSTR-2B), and their final tax payment and summary return (GSTR-3B). In such a system, there would be very little room for deviation or manual adjustment. The changes effective from October 2025, by making the IMS the mandatory gateway for ITC, are a foundational step in building this fully transparent, data-driven, and self-regulating tax ecosystem.
Frequently Asked Questions (FAQs)
IMS & Procedural Questions
What happens if I take no action on an invoice in the IMS by the due date?
If you do not take any action (Accept, Reject, or Pend) on an invoice, it will be "deemed accepted" by the system when you file your GSTR-3B. The ITC for that invoice will automatically be included in your GSTR-2B and will be considered as claimed.3 This carries the risk of accepting an incorrect invoice.
Can I file my GSTR-3B if some of my invoices are still in 'Pending' status in the IMS?
Yes. You can generate your GSTR-2B and file your GSTR-3B even with some invoices in 'Pending' status. However, the ITC for these pended invoices will not be included in the current month's GSTR-2B. You can claim the credit in a subsequent month after you resolve the issue and 'Accept' the invoice.
What is the time limit for a supplier to correct an invoice that I have 'Rejected'?
There is no specific time limit prescribed for the supplier. However, the rejection is communicated to them via their dashboard. It is in their commercial interest to correct the invoice and re-upload it in their next GSTR-1 filing so that you can accept it and they can be assured of their tax payment being correctly accounted for.
How do the new IMS rules apply to QRMP (Quarterly Return Monthly Payment) scheme taxpayers?
For QRMP taxpayers, the GSTR-2B is generated quarterly. Invoices uploaded by their suppliers in the first two months of the quarter (M1 and M2) via the Invoice Furnishing Facility (IFF) will appear in the QRMP taxpayer's IMS. The taxpayer can take action on these invoices, but the consolidated GSTR-2B and the ITC claim in GSTR-3B will be for the quarter as a whole.
If an invoice is 'Deemed Accepted' but is incorrect, what is the correction mechanism?
If an incorrect invoice is deemed accepted and ITC is claimed, you must reverse this ITC in your GSTR-3B of a subsequent period. The supplier would need to issue a credit note or an amendment to correct the original invoice, which would then appear in your IMS for you to act upon, leading to a formal reversal of credit.
ITC and GSTR-3B Questions
Since ITC is no longer auto-populated, where exactly do I get the final figure to enter in GSTR-3B?
The final, consolidated ITC figure (broken down by IGST, CGST, SGST/UTGST) that you need to manually enter in your GSTR-3B will be available in your Form GSTR-2B, which you must generate after you have completed all your actions (Accept/Reject/Pend) in the IMS for that tax period.
Can I claim more ITC in GSTR-3B than what is reflected in my GSTR-2B generated from the IMS?
No. The new system is designed to prevent this. The ITC claim in GSTR-3B must reconcile with the eligible ITC as per the IMS-generated GSTR-2B. Claiming excess credit would be a direct violation and would likely be flagged by the system, leading to notices and potential penalties.
What happens to the ITC on an invoice that my supplier files after the GSTR-1 due date?
If your supplier files their GSTR-1 for a particular month (e.g., October) after the due date, the invoice will appear in your IMS dashboard for the subsequent month (November). You will then be able to accept it and claim the corresponding ITC in your GSTR-3B for November. You cannot claim the credit for October.
Broader Reform Questions
With the 28% slab gone, what is the new tax rate on items like cement and air conditioners?
Both cement and air conditioners, which were previously in the 28% slab, have been moved to the 18% GST slab, effective September 22, 2025. This is expected to significantly reduce their cost.
I had claimed ITC on the construction of my factory building. Do I need to reverse it now because of the retrospective amendment?
This is a complex issue. The retrospective amendment to Section 17(5) legislatively blocks ITC on the construction of immovable property from July 1, 2017. If you have claimed such credit, you may be liable to reverse it along with interest. It is highly advisable to consult with a tax professional to assess your specific situation and potential liability, as this is expected to be a major area of litigation.
Does the GSTR-9 waiver for turnover below ₹2 crore apply to the financial year 2024-25?
Yes. The notification specifies that the exemption from filing the annual return (GSTR-9/9A) for taxpayers with an aggregate annual turnover up to ₹2 crore is applicable from the financial year 2024-25 onwards.
Is the GST exemption on health insurance applicable to group insurance policies taken by companies for their employees?
The notifications and press releases explicitly mention the exemption for individual health and life insurance policies. The applicability to group insurance policies provided by employers is not explicitly stated and may require further clarification from the CBIC. Businesses should monitor official circulars for a definitive answer on this matter.
About the Author
Nikhil Jain is a Founder and CEO of TAXPATH INDIA with over 7 years of experience in taxation and compliance. He specializes in GST implementation and has helped numerous businesses navigate the complexities of indirect tax compliance
Contact Information:
Email: contact@taxpathindia.com
Phone: +91-9042364130
Website: www.taxpathindia.com
Disclaimer:
This article is for informational purposes only and should not be considered as professional tax advice. Readers are advised to consult qualified tax professionals for specific compliance requirements and business decisions.
