What do we observe about GST at the firm level?

by Ajay Shah and Atibhi Sharma.

The introduction of the Goods and Services Tax (GST) in 2017, was an important milestone in the evolution of Indian tax policy. By consolidating a fragmented web of central excise, state value added taxes (VATs), and local entry taxes, the reform promised a unified, destination-based consumption tax. This concept is generally termed VAT worldwide. The original document (Kelkar et. al. 2003) used the term GST in order to avoid confusion with the then-prevalent Central Value Added Tax (CENVAT).

At its core, the value proposition of a modern VAT is neutrality: it taxes only final consumption. This is achieved through the Input Tax Credit (ITC) mechanism, which allows businesses to offset taxes paid on inputs against their output tax liability. Taxes should flow seamlessly through the production chain without cascading or sticking to intermediate producers. In recent years, there has been considerable concept drift, and a loss of coherence in the GST as it is practiced today. Input tax credit - the beating heart of the GST - is blocked in many situations (Modi & Shah, 2026).

A key element of building knowledge in India about tax policy as it affects firms would be to study the firm data on the subject of the GST. To do this, we turn to the CMIE Prowess database and ask questions about what is going on. A remarkable fact about the CMIE firm data, however, is that almost nothing about the GST is observed. By its very design, the GST is invisible to firm accounting. Under Indian Accounting Standards (Ind AS) and Schedule III (which sets out the mandatory presentation format and notes for financial statements) rules under the Companies Act (2013), gross GST transaction flows are completely netted out of corporate Profit and Loss statements. Consequently, firm-level GST in India is functionally unobserved.

Foundations

GST is a tax upon value added where firms are not levied indirect taxes like earlier; final consumers are taxed. Rather than taxing gross turnover at each stage of production (which creates a cascading tax-on-tax), GST allows a registered business to deduct the tax paid on its inputs from the tax it collects on its outputs. In this system, the firm effectively acts as a pass-through tax collector, holding collected output tax as a statutory liability to be remitted to the government. The accounting identity governing a firm's net GST liability is:

Net GST Incidence = Output GST Payable - Input Tax Credit (ITC)

Here, `Output GST Payable' is the statutory tax collected by the firm on behalf of the government, `Input Tax Credit' (ITC) is the tax paid on inputs and capital goods, and `Net GST' is the cash deposited into the government treasury via the electronic cash ledger.

Consider three realistic scenarios:

Scenario 1: Clean manufacturing flow.

An FMCG manufacturer purchases raw agricultural products, packaging materials, and energy for Rs.1,00,000 plus 18% GST (ITC of Rs.18,000). The firm processes these inputs and sells packaged goods to distributors for Rs.1,50,000 plus 18% GST (Output GST of Rs.27,000). Net GST paid in cash equals Rs.27,000 - Rs.18,000 = Rs.9,000. The economic value added is Rs.50,000, and 18% of Rs.50,000 is exactly Rs.9,000. The tax system functions neutrally as a pure value-added tax.

Scenario 2: One ITC blockage example.

A textile or fertiliser firm purchases raw materials and logistics services for Rs.1,00,000 at 18% GST (ITC of Rs.18,000, split between Rs.10,000 on input goods and Rs.8,000 on input services). Statutory caps limit the output tax rate on finished fabric to 5%, yielding Output GST of Rs.10,000 on Rs.2,00,000 of sales. The firm accumulates unutilised ITC of Rs.8,000. Under Rule 89(5) of the CGST Rules (2017), cash refunds under S.54(3) of the CGST Act (2017) are restricted strictly to input goods, while refunds for ITC accumulated on services are legally barred. Now the effective GST paid by the firm is 10,000 - 10,000 + 8,000. This excess Rs.8,000 is not visible in the financial statements.

Scenario 3: Another ITC blockage example.

A steel firm spends Rs.50,00,000 on constructing a factory building, paying 18% GST (Rs.9,00,000). Separately, the firm spends Rs.10,00,000 on mandatory Corporate Social Responsibility (CSR) activities, paying Rs.1,80,000 in GST. Under S.17(5)(d) and S.17(5)(fa) of the CGST Act (2017), ITC is explicitly blocked for immovable property construction and CSR. Therefore there is an excess GST payment of Rs.10,80,000. Under Ind AS 16, the Rs.9,00,000 blocked GST is capitalized into Property, Plant and Equipment (PPE), while the CSR GST is absorbed into operating expenses. The blocked GST loses its tax identity entirely, cascading into product costs and depreciation schedules without appearing as tax.

What accounting standards say

Why do these substantial GST cash flows disappear from corporate financial reports? The answer lies in Indian Accounting Standards (Ind AS 115 and Ind AS 16) working in tandem with Schedule III of the Companies Act (2013).

Under Ind AS 115 (Revenue from Contracts with Customers), revenue is recognized only to the extent of economic benefits flowing to the enterprise. Because GST is an agency transaction, indirect tax flows are presented strictly as balance sheet items rather than Profit & Loss (P&L) line items:

• Sales revenue is reported net of Output GST.
• Operating expenses are reported net of Input GST, as input tax is treated as an asset (receivable).

Furthermore, because the balance sheet captures only a point-in-time snapshot of residual unadjusted receivables or payables at fiscal year-end (March 31), the reported amounts may not be large. A large enterprise may handle thousands of crores in gross GST transactions during the year, but because monthly output liabilities are continuously set off against input credits, for a typical non-financial firm, the year-end balance sheet item appears modest or negligible. This creates a misleading impression of a minor indirect tax incidence while concealing the true volume of tax transactions and unrecovered credits.

To see how these disclosure rules function in practice, we inspect audited financial statements across three representative major Indian enterprises:

1. Tata Steel

Prior to GST, excise duty was reported as a gross revenue component with a transparent deduction line on the face of the Profit and Loss statement.

Following GST adoption, this disclosure vanished completely as excise duty was no longer applicable. Revenue from operations is reported net of GST, with zero line items for indirect taxes on the face of the P&L.

2. Britannia Industries

In Britannia's post-GST annual report, we are able to observe the outstanding GST liabilities as of the end of the year combined with employee payroll taxes and TDS under Note 24 ("Other current liabilities").

Similarly, unutilized input tax credits at the end of the year is bundled under Note 17 ("Other current assets") under the generic heading "Balance with government authorities".

3. Shriram Finance

For financial firms, the accumulation of ITC is explained by Rule 38 of the CGST Rules, which lets NBFCs choose between a detailed calculation or simply keep 50% of eligible ITC each month, letting the rest lapse. Once a firm opts for either method in a year, it cannot switch back until the next year. Shriram Finance's separate disclosure of "GST credit receivable" follows the ICAI guidance note on Division III of Schedule III to the Companies Act, 2013 for NBFC that is required to comply with Ind AS, which provides for such credit to be shown under "other non-financial assets." Notably, this figure is cumulative since GST's introduction in 2017, not a single year's number. However, since this detailed disclosure is not mandatory, practice varies across NBFCs - some report it as a separate line item, while others club it under "Balances with government authorities".

Simultaneously, statutory tax liabilities are aggregated under "Statutory dues payable" in Note 29. This is a mix of TDS payable, GST payables, and other statutory dues.

What's observed in the CMIE database

Because corporate databases like CMIE Prowess compile financial data directly from audited annual reports, the database inherits the structural netting mandated by Ind AS.

When an empirical researcher queries CMIE Prowess for firm-level GST data, the active flow of GST is missing. Instead, Prowess only captures a set of residual variables:

• sa_sales: Captures sales revenue net of output GST.
• exp_gst (GST Expenses): This variable remains completely empty or missing for virtually all non-financial and manufacturing firms because GST is a balance-sheet pass-through.
• sa_indirect_taxes: Pre-2017, this field captured excise duty and sales tax. Post-2017, Prowess maps this field to "rates and taxes, net" in Other Expenses, capturing only non-creditable local taxes, municipal rates, or tax dispute write-offs.

To help fix intuition, here are numerical values seen in CMIE Prowess fields for the three firms in FY 2024-25:

CMIE Prowess Variable	Tata Steel	Britannia Industries	Shriram Finance
sa_sales (Sales Revenue)	Rs.1,32,516.66 Cr (Net of GST)	Rs.16,859.22 Cr (Net of GST)	Not applicable for a financial firm
exp_gst (GST Expenses)	Missing / Empty	Missing / Empty	Missing / Empty
sa_indirect_taxes (Indirect Taxes in P&L)	Very Low (Local rates & cesses)	Very Low (Excludes creditable tax)	Negligible

A Policy Proposal

Measuring GST at the firm level is essential for understanding the operational efficiency, tax incidence, and financial health of Indian firms. Without visibility into gross GST collections, input tax credits, and blocked credits, researchers, investors, and policymakers remain unable to evaluate how indirect taxes affect corporate behavior, capital allocation, and productivity in India. Therefore, achieving transparency requires an explicit and separate regulatory strategy focused directly on mandatory disclosures.

The ideal list of information required in a standardized P&L addendum disclosure (or mandatory Note to Accounts) includes:

• Gross Output GST collected on sales and turnover.
• Gross Input Tax Credit (ITC) claimed on procurements (distinguishing input goods, input services, and capital goods).
• Net GST deposited in cash via the electronic cash ledger (GSTR-3B).
• Total blocked ITC under Section 17(5) of the CGST Act (disaggregating amounts capitalized into Property, Plant and Equipment vs expensed into P&L).
• Pending GST refund claims under Section 54 of CGST Act along with a standardized ageing schedule.

To implement this, the requirement must be inserted into Schedule III to the Companies Act, 2013 overseen by the Ministry of Corporate Affairs (MCA).

This regulatory amendment carries three major benefits with minimal friction:

• Market transparency: Enables equity analysts, credit rating agencies, and lenders to assess working-capital drag from trapped ITC and true cost distortions from blocked credits under Section 17(5).
• Public economics research: Unlocks systematic firm-level empirical research on indirect taxation without relying on restricted tax return data.
• Near-zero compliance cost: Firms already compute and audit these exact figures monthly for their GST filings. Publishing a summary reconciliation note in annual reports imposes virtually zero incremental reporting cost.

Conclusion

At present, firm-level GST in India remains unobserved in public corporate databases. When researchers analyze fields in CMIE Prowess, they are not observing the true magnitude or incidence of GST, because P&L sales and expenditure fields exclude these indirect taxes by design. Attempting to estimate corporate tax elasticity, compliance, or indirect tax incidence from these database fields is fundamentally flawed. The complete, itemized record of GST payables and receivables - reported across monthly returns for outward sales (GSTR-1), auto-drafted input credits (GSTR-2B), and summary tax settlements (GSTR-3B) - remains locked inside the administrative database of the GSTN. Mandating addendum disclosures under Schedule III offers a simple, low-cost path to restoring financial transparency.

Bibliography

Kelkar, Vijay L., D. C. Gupta, Vineeta Rai, N. S. Sisodia, D. Swarup, and Ashok K. Lahiri. 2004. Report of the Task Force on Implementation of the Fiscal Responsibility and Budget Management Act, 2003. New Delhi: Ministry of Finance, Government of India. http://www.dea.gov.in/files/other_reports_documents/1.pdf.

Modi, Arbind, and Ajay Shah. 2025. "Input Tax Credit and refunds under GST in India: Conceptual and legal framework." Working Paper 44. XKDR Forum. December 2025. https://www.xkdr.org/paper/input-tax-credit-and-refunds-under-gst-in-india-conceptual-and-legal-framework.

The authors are researchers at XKDR Forum. We thank Mahesh Vyas, Arbind Modi, Megha Patnaik, Sanhita Sapatnekar and Susan Thomas for their comments and suggestions.

The lowest hanging fruit on the coconut tree: India's climate transition through the price system in the power sector

by Akshay Jaitly and Ajay Shah.

The world is projected to emit about 50GT of CO2 per year by 2055. Climate scientists say (net) emissions need to be ended by 2055, in order to avoid catastrophic events with reasonable probability. At present, India is emitting 2.5GT per year with a long term trend growth rate of about 5%. India is the 4th largest source of CO2 in the world, accounting for 7\% of emissions, with emissions that are roughly as large as those of the European Union. In a new paper, The lowest hanging fruit on the coconut tree: India’s climate transition through the price system in the power sector, we engage in strategic thinking about India's decarbonisation.

Decarbonising any economy is a large and complex problem. The electricity sector is a key site of the carbon transition, as it directly makes CO2 (e.g. by burning coal and gas), and because decarbonisation in other areas (e.g. cooking) involves switching away from fossil fuels to electricity. The sector is formally organised, which makes it more susceptible to policy intervention. Thus, in every country, decarbonisation calls for a large modification of the resource allocation in the electricity sector. Technical and business model decisions are required at each location in an economy about the optimal mix of renewables, storage and demand-side adjustment for the zero emissions world.

The Indian electricity sector is poorly placed to perform the required modification of this resource allocation. At present, it is a centrally planned system that is under growing financial stress. The process of private investment in electricity has lost momentum. Resource allocation is inefficient owing to multiple prices and a command-and-control system, rather than one based on producers and users that respond to prices. The command-and-control system works poorly in steady state, and particularly poorly when large changes in the resource allocation are required. By imposing enlarged costs upon the economy, a centrally planned decarbonisation runs the risk of greater political difficulties. The electricity sector is thus the critical choke point in India's climate transition.

Looking forward, the problems of the electricity sector are likely to deepen. Rising Indian emissions in coming years will sit uneasily alongside a decarbonising world. Regardless of the speed at which Indian policy makers might desire a change in course, there are forces reshaping the behaviour of Indian firms which are narrowing the options. Indian firms now operate under international asset pricing, and ESG investment has changed the incentives of Indian firms to favour buying and selling renewables. Some large economies could, in coming years, introduce trade taxes upon the carbon content of Indian exports. This would additionally induce Indian firms to desire reducing emissions in their supply chain. The cross-subsidy system within the electricity sector will come under increasing stress when buyers see renewables inducing some combination of a lower cost of capital, a lower operating cost and reduced trade barriers.

For 30 years now, political and fiscal resources have been expended in periodic incremental reforms of the electricity sector. These have not delivered the desired results. It is unlikely that similar efforts will work in coming years. In the meantime, 2021 is likely to be a turning point in the demands made upon the electricity sector owing to the carbon transition.

The climate transition is one of the most complex problems in Indian public policy and will now be subject to the new commitments made at COP26. A coherent strategy needs to be established and articulated, which can reshape the behaviour of a billion private persons across space and time.

This involves going with the grain of the price system, i.e. stepping away from the command-and-control system. All firms in the electricity sector need to be creatures of the market economy, which constantly reshape technology and business models in response to prices. Such firms have the incentive and the ability to look at the changing landscape of technology, financing and carbon taxation, and solve local maximisations that yield the correct engineering and business solutions all across the country. This distributed intelligence, this self-organising system, processes information better, values profit over conservatism and populism, engages in a process of search with risk-taking where some win and some lose, and avoids the state capacity constraints that hamper the central planning system. It will achieve the required Indian climate transition at a lower cost to the economy when compared with a centrally planned path.

Under an electricity sector that is grounded in the price system, there is a clear pathway to the climate transition: the single instrument of the carbon tax. Following a 5-10 year reform process of the electricity sector, the Indian state would announce levels of carbon taxation for the next 25 years, based on international commitments towards decarbonisation and net zero. Private persons would respond to these numerical values with business and technological strategies that are optimal at every location in the country. Every five years, policy makers would review the emissions, and modify the trajectory of taxes for the coming 20 years. Policy makers would control this one lever -- the carbon tax -- and the decarbonisation of the economy would be achieved through private decisions on the demand side, in generation and in storage.

Without a carbon tax, the union government lacks instruments for carbon policy, and intricate regulatory activities will induce enhanced costs upon the economy. Without an electricity sector that is organised around the price system, the resource allocation will be distorted thus enhancing the economic cost of decarbonisation. The optimal way forward is a combination of electricity regulation at state governments, a carbon tax led by the union government, and a private electricity sector organised around the price system.

While this appears to be an attractive vision, it is also a difficult policy project. Immense effort has been put into electricity reform in the past, by insightful policy makers. These leaders of Indian electricity reform, of the last 30 years, stayed within the strategy of a centrally planned electricity system. Why do we believe that things could work differently today?

There are six aspects in which the present situation is different, which creates a pathway to the fundamental reform that was elusive for the last 30 years: (1) There is greater understanding of the political economy landscape, and it is possible to design bargains where the losers from the reform are compensated. (2) State capacity in regulation is essential for the operation of an electricity sector organised around the price system, and there is now a greater understanding in India of how to establish the objectives and methods of regulation. (3) There is a path to electricity reform, one state at a time, which is more tractable and feasible when compared with grand schemes led by the union government which apply to the entire country. (4) The materiality of climate policy in the international discourse has shifted the political salience of domestic electricity reforms. Alongside this, the domestic policy envelope on establishing more market-led solutions has improved. (5) It is possible to fund the transition. (6) The fiscal cost of upholding the status quo in the electricity sector is likely to rise.

Income Tax Scorecard: Can there be a holistic view of the Budget proposals?

by Surya Prakash B S and Kangan Upadhye.

Is it possible to have a unified view of a legislation that pieces together its various provisions? In our paper we present a novel methodology that measures direct tax provisions of the Finance Bill, 2017 (Government of India Budget, 2017) presented by the Union Government of India to the Lok Sabha, against accepted principles of taxation and tax system design.

The Finance Bill seeks to amend many parts of the Income Tax Act and consequently impacts sections of the society differently. Popular media coverage tends to focus on impact on some sectors or a few controversial measures. This is natural given that budget making is a contentious exercise that needs to address concerns from all quarters. Our methodology avoids analysis either from the perspective of the state (revenue mobilisation) or the taxpayers (revenue minimisation). It measures each direct tax provision to see how well they perform against principles of taxation.

Our method consists of a set of “attributes” and “impacts” for which we assign scores. Attributes relate to the objective features of the provisions: we categorise provisions/amendments into compliance, substantive, procedural, exemptions, collection and recovery, anti-avoidance, penal provisions, international taxation and adjudication machinery. A total of 97 provisions in the Finance Bill 2017 are categorised under these attributes.  A single provision could have more than one attribute. For example, the amendments proposed to section 13A which is related to exemption from paying income-tax for political parties, to discourage the cash transactions and to bring transparency about funding political parties is an example of a provision categorised under more than one attribute. It is categorised not only under compliance but also recognised as substantive.

A summary of the above step is depicted below. It can be observed that the Finance Bill, 2017 contained 26 provisions relating to ‘Exemptions’, 22 that were ‘Substantive’ and 21 that made changes to ‘Computation’.

Since the provisions could have various levels of impact, we go on to score them on a seven point scale (-3 to +3) against each of the following seven principles of an ideal tax system design:

1. Transparency: Whether there have been any prior public consultations.
2. Simplicity: Whether the provisions makes levy and collection simpler.
3. Stability: Whether the provisions are prospective or retrospective in nature.
4. Discretionary power: Whether and to what extent discretionary power of tax officers have been enhanced or decreased.
5. Tax rates: Whether and by how much have tax rates have been decreased. Lowering tax rates get higher scores.
6. Tax base: Is the income on which tax is levied increased or decreased. As a principle when more types of income are charged, a higher score is given. As a corollary, exemptions are scored lower.
7. Number of taxpayers: Provisions that extend the levy to more taxpayers have higher score. If a few of them are exempted it gets a lower score.

The scores are calculated in percentage terms (after converting negative scores to positive for ease of comparison) and the results are as depicted in the figure below.

The provisions in the bill score fairly well on simplicity, stability and discretion parameters with moderate scores on taxpayers, tax base and rates relative to the others. The provisions perform poorly on the transparency parameter.

Our results from the framework do support the popular thinking about the 2017 financial bill the way industry experts and practitioners have interpreted in the budget discourse (Chakrabarti et al. 2017).  For example, the amendment to section 132  which empowers relevant authorities under the Income Tax Act, 1961 to carry out a search or seizure without having to declare reason to believe such person or any authority or appellate tribunal, previously required under section 132 of the Income Tax Act, 1961 (Government of India Budget, 2017).

The earlier provisions empowered authorities to enter and search any building, person if they had a reason to believe that the person had failed to disclose material facts. As critics argue without having a reason to declare for search or seizure this power can be misused to conduct arbitrary investigations leading to harrassments and tax terrorism. This provision was rated low on all the parameters. By adopting such a systematic approach to evaluating tax amendments, this could serve as an evidence informed input to the design of taxes in our budgeting system.

To the best of our knowledge, we have not come across any similar methodology in use in any major economy. The methodology is objective, the impact parameters and the attributes categorised are transparent, and these assumptions can be revised by those that seek to view the results based on alternate views or perform a sensitivity analysis.

We are aware that scores given can be made more accurate through data based post hoc impact assessments. Further research is required on this aspect.
The practical value of the results from our approach are many. It would a) enable us to base the study of the Finance Acts against principles of a good tax system b) provide a comprehensive view of the taxation system rather than a view traditionally restricted to revenue objectives or taxpayer hardship; and c) enable a mapping of the trajectory of tax policy by allowing us to compare across years. It can be viewed as a first step towards making the budget-making process transparent, empirical, and inclusive. The methodology used in this paper can potentially also be used to study other legislation and amendments.

The authors are researchers at Daksh. The authors are thankful to Shreya Rao and Shweta Mallya for their contribution during the conceptualisation phase of this paper. This paper was presented at the APU-NIPFP workshop Strengthening the Republic #1, January 11, 2020.