GST 2.0: Fixing Litigation, Fake ITC, and Compliance Burden in 2024–25

Abstract

India’s GST regime has entered a consolidation phase (“GST 2.0”) focused on three fronts: (i) restoring appellate discipline via the operationalisation of the GST Appellate Tribunal (GSTAT), (ii) curbing fake ITC through data-led registration and return controls, and (iii) simplifying compliance for bona fide taxpayers. Recent policy moves—GSTAT launch and e-filing, biometric Aadhaar verification, tighter return flows, and Council-led rationalisations—signal a shift from roll-out to refinement.

Introduction

Seven years post-launch, GST’s core frictions are familiar: litigation backlogs (in the absence of a functioning tribunal), persistent fake ITC via paper entities, and process-heavy compliance for honest businesses. In 2024–25, the Centre, States, and GST Council have moved to institutionalise dispute resolution, harden the perimeter against bogus registrations/credits, and smooth day-to-day compliance—a pivot from expansion to stabilisation.

1) Litigation: From Vacuum to a Digitally-Enabled Tribunal

After years of delay, GSTAT has been formally launched, with the Principal Bench in New Delhi and multiple State Benches notified and territorially mapped. Bench jurisdictions were clarified through late-2024 notifications; during 2025, appointments accelerated and digital enablement has followed (including a phased e-filing schedule for appeals). These steps are expected to unclog High Courts, restore first-principles uniformity on valuation, classification, and place-of-supply, and reduce time-to-finality. Why it matters: For businesses, appellate certainty feeds pricing, contract risk allocation, and provisioning. For administrations, a functioning tribunal curbs forum shopping and improves doctrinal coherence.

2) Fake ITC: Hardening the Perimeter with Data, Biometrics and Flow Controls

The scale of the menace remains large: in just Q1 FY 2025–26, authorities reported ₹15,851 crore of fake ITC detected, busting 3,558 bogus firms; across FY 2024–25, the figure cited was 25,009 fake firms linked to ₹61,545 crore in fraudulent ITC.

New safeguards target the lifecycle of fraud:

• Biometric/Aadhaar-based verification and on-site/document checks at registration (piloted and progressively expanded) to weed out non-existent entities at the gate.

• Return-flow tightening: from July 2025, auto-populated liabilities in GSTR-3B are effectively locked; corrections shift to GSTR-1A, increasing supplier-side accuracy and reducing scope for post-hoc manipulation that fueled ITC misuse.

• Network analytics: GSTN’s invoice graphing, PAN-GSTIN link analysis, and geo-signals to flag circular trading, credit-only entities, and “bill-to-ship-to” anomalies.

Policy caution: Strong perimeter controls can overshoot into routine credit blocking, straining MSME working capital. Clear SOPs for risk-rating, time-bound verification, and reasoned orders become essential to avoid equating clerical mismatches with fraud.

3) Compliance Burden: Toward Trust-Based, Automated Compliance

The Council’s 2025 decisions point to simplified rates, cleaner place-of-supply rules for intermediaries, faster, risk-based refunds (including 90% provisional for zero-rated/inverted cases), and a fast-track registration pathway for small/e-commerce suppliers—together with explicit timelines to stand-up GSTAT.

At the micro-process level, pre-filled ITC via GSTR-2B continues as the anchor for auto-drafted credits, and the tighter GSTR-1 → 3B coupling is pushing accuracy upstream.

Net effect: A shift from control-heavy to design-heavy compliance—where accurate first filings and automated cross-checks lower total friction for compliant taxpayers, even as the system becomes less forgiving of slippage.

What Remains Hard

1) Interpretational churn on mixed/composite supplies, intermediary services, and discounting mechanics—though the 2025 overhaul on Section 15(3)(b) and related circular withdrawal aims to reduce disputes on post-supply discounts and credit notes.

2) Centre–State coordination on rate rationalisation and revenue-sharing that slows structural changes.

3) Enforcement granularity: uneven field practices (registrations, summons, credit blocking) still produce state-level divergence in taxpayer experience.

The Road Ahead (Professor’s Recommendations)

• Codify appellate timelines and publish disposal dashboards for GSTAT to build predictability (and reduce provisioning).

• Proportionate risk controls: graduate responses—from nudges to targeted verification—before coercive actions; ensure time-bound unblocking of clean ITC.

• Upstream accuracy: promote supplier-side discipline with nudges and near-real-time GSTR-1A processing windows to prevent buyer cash-flow shocks.

• Capacity building: sustained officer training on analytics-led audits; taxpayer education on discounting/credit-note mechanics post-2025 changes.

Conclusion

GST 2.0 is less about adding rules and more about re-architecting the system’s incentives. A functioning, digitally-enabled tribunal addresses the litigation overhang; hardened registration/return flows make large-scale fake ITC harder; and Council-led simplifications aim to let genuine businesses file once, file right, and move on. The promise of 2024–25 is a GST where trust-by-design coexists with deterrence-by-design—if execution stays proportionate, transparent, and time-bound.

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Footnotes / References

1) Territorial jurisdictions and seating of GSTAT State Benches notified (S.O. 5063(E), 26-11-2024).

2) GSTAT launch and appointments (Sep 2025).

3) Phased e-filing of GSTAT appeals (Sep 2025).

4) Digital modernisation project awarded for GSTAT benches (Oct 2025).

5) Scale of fake-ITC detection (FY 2024–25; Q1 FY 2025–26).

6) Biometric/Aadhaar-based verification advisories (Mar 2025).

7) Aadhaar authentication framework under GST (background and practice notes).

8) GSTR-3B lock-in and shift to GSTR-1A corrections (from July 2025).

9) Illustrative sectoral fake-ITC rackets detected (May 2025).

10) 56th GST Council: compliance simplification, fast refunds, tribunal timelines.

11) 56th GST Council summaries (auxiliary brief).

12) GSTR-2B (auto-drafted ITC statement) – overview.

13) 2025 changes to discounting/credit notes and rescission of 2024 circular.

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