GST Council scraps arrest powers of tax officers, raises prosecution threshold to ₹5 crore

The GST Council on Thursday recommended scrapping the arrest powers of tax officers and raising the threshold for prosecution to ₹5 crore from ₹1 crore, Finance Minister Nirmala Sitharaman said after the Council’s 57th meeting.

The Council also decided against any changes in GST rates, with Sitharaman saying the “rate structure is settled” and rate-related matters would be taken up once a year.

The government release said the 57th meeting focused primarily on process reforms covering registration, returns, refunds and adjudication, along with measures to facilitate trade and streamline GST compliance.

Arrest powers scrapped, prosecution threshold raised

The Council recommended complete withdrawal of arrest powers under GST by removing Section 69 of the CGST Act. It also recommended raising the monetary threshold for prosecution from ₹1 crore to ₹5 crore.

The Council also recommended reducing the maximum general penalty from ₹25,000 to ₹10,000.

The measures form part of what the government described as “Next-Gen GST Process Reforms”, aimed at simplifying compliance and reducing litigation for taxpayers.

Wider opportunities for service exporters

The Council recommended changes to GST rules governing exports of services. The reforms will facilitate refunds for Indian service providers supplying services to or through their foreign offices or branches.

It also recommended changes to place-of-supply rules for services involving goods made physically available by the recipient, which the government said would facilitate access to export-related benefits for Indian service providers. The Council also recommended clarification on receipt of export payments in foreign exchange or Indian rupees, as permitted by the RBI.

Faster refunds, easier registration

The Council recommended reducing the time limit for issuing an acknowledgement or deficiency memo on GST refund applications from 15 days to 10 days. If neither is issued within 10 days, the application will be deemed acknowledged by the system.

For refunds relating to zero-rated supplies and inverted duty structure, 90% of the amount claimed will be sanctioned provisionally and automatically based on system-based risk assessment. Full refunds of excess balance in the electronic cash ledger will also be sanctioned automatically without officer intervention.

Karthik Mani, Partner & Leader – Indirect Tax: South, Tax & Regulatory Advisory at BDO India, said, “Allowing refunds on input services under the inverted duty structure is a significant reform for sectors such as FMCG, pharmaceuticals and jewellery. Accumulated input tax credit on services had become a serious drag on working capital for these industries. Permitting refunds on credit availed from November 1, 2026 will ease that pressure and give these sectors a meaningful boost.”

The Council also recommended a more streamlined registration process, including clearer documentation requirements, a more user-friendly GST portal and automatic acceptance of amendments to registration particulars in eligible cases. Cancellation of registration will also be simplified, including automatic acceptance in specified cases.

Relief for small e-commerce sellers

The Council recommended a simplified GST registration mechanism for small suppliers selling goods through e-commerce operators in states where they do not have a physical presence. Eligible sellers will be able to declare the warehouse of an e-commerce operator in that state as their principal place of business, subject to conditions. The government said the measure will allow small sellers to expand to other states through e-commerce platforms without having to establish a place of business in every state.

ITC relief for employee insurance

The Council also recommended removing restrictions on input tax credit for several categories, including health and life insurance, outdoor catering, telecommunication towers and pipelines laid outside factory premises, among others. The government said the move would reduce cascading of taxes and ensure a smoother flow of ITC across the supply chain.

Sajja Praveen Chowdary, Director & CEO – Policybazaar for Business, said, “The officially approved Input Tax Credit (ITC) on health and life insurance policies by employers is a welcome move that can significantly ease the cost burden for corporates, particularly MSMEs.”

He added, “The 18% input tax credit on employee health and life insurance can make group insurance more affordable for smaller businesses, which often rely on such benefits to attract and retain talent.”

GST returns, notices get easier

The Council recommended changes to GSTR-1/1A/IFF to improve reconciliation with GSTR-3B and mechanisms to correct reporting of tax liability and ITC. The proposed alternate mechanism is intended to reduce mismatches, demand notices and system-generated intimations. It is proposed to come into force from the April 2027 return period, subject to consultation.

The Council also recommended a ₹10,000 minimum threshold for issuing show-cause notices, with pending notices and appeals involving less than ₹10,000 to be dealt with as if the threshold had been in force. It also recommended a 5% penalty in non-fraud cases where tax along with interest is paid within 30 days under Section 73 or 60 days under Section 74A of the adjudication order.

The Council also recommended that vehicles carrying goods can be intercepted only on specific intelligence and with authorisation from an officer not below the rank of Joint Commissioner. There will be no interception in transit states where neither the supplier nor recipient is located or registered, subject to specified exceptions.

For small taxpayers, the Council also approved in principle an Annual Return Quarterly Payment (ARQP) scheme for those with turnover of up to ₹5 crore who exclusively make B2C supplies.

On rates, Sitharaman said, “No rates have been changed at this meeting; rate matters will be taken up once a year.”