GST reforms need urgent review to ease industry cash flow stress

The recent changes in India’s Goods and Services Tax (GST) system aimed to simplify taxation, but they have created new problems for industries, especially those operating under the Inverted Duty Structure (IDS). The government removed the 12 per cent and 28 per cent GST slabs and consolidated them into 5 per cent and 18 per cent rates. While this rationalisation promised clarity and efficiency, in practice, it has caused a serious cash flow problem for many businesses, particularly in Punjab. The state’s industries, including tractors, farm equipment, and other ancillary sectors, form the backbone of its industrial economy. Delays in refunds are now threatening their operations and could slow down the state’s economic revival.

Under the IDS, industries pay higher GST on raw materials such as steel, rubber, and plastics, while their finished products attract lower GST. For example, a tractor manufacturer pays 18 per cent GST on inputs but charges only 5 per cent GST on the final product. The difference is legally refundable through Input Tax Credit (ITC), which prevents tax cascading and ensures fairness. However, in Punjab, delays in processing these refunds often stretch for six months or more. This blocks working capital, forcing companies to borrow at high interest rates to maintain operations. For industries operating on thin margins, this is not just an accounting problem but a major financial bottleneck.

The consequences are significant. First, the liquidity crunch increases costs and creates financial stress. Companies must borrow money to cover daily expenses, slowing down investment in production, wages, and innovation. Second, competitiveness suffers. When companies face delayed refunds, the effective cost of production rises. Punjab’s products become less competitive compared to other states or regions where industries are not trapped in the IDS system. This situation risks discouraging investment and slowing industrial growth at a time when the state is seeking to boost manufacturing activity.

Solutions for timely GST refunds

Addressing the IDS refund issue is essential for sustaining Punjab’s industrial growth. The problem is not new; refund delays have long been a feature of GST administration. However, the recent slab rationalisation has increased the urgency to resolve the issue. For industries, timely refunds are not a favor—they are legally guaranteed entitlements. Punjab cannot allow manufacturers’ cash flows to be hostage to bureaucratic delays. Without prompt action, the state risks undermining investor confidence and stalling its industrial revival.

A practical roadmap for resolving the issue could include three main steps. First, a time-bound refund mechanism is necessary. The central government has already announced that it plans to process IDS refunds within a week once documentation is complete. Punjab could complement this by establishing a state-level statutory timeline of 10–15 days for refunds, with automatic approval if no queries arise. To ensure accountability, penal interest could apply to refunds delayed beyond 30 days. This would reduce reliance on expensive working capital loans and provide certainty to industries.

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Second, a digital-first processing system could help avoid unnecessary delays. Although GST processes are digital, refunds often get stuck in repeated rounds of clarification and document verification. Punjab could implement an auto-validation system that cross-checks input and output GST credits using the GSTN platform. A dedicated state-level help desk, staffed with trained officers, could ensure that IDS refund issues are resolved efficiently and without red tape.

Third, Centre–state alignment is crucial. Since the GST pool is managed centrally, Punjab must proactively coordinate with the Union government to ensure smooth fund transfers for refunds. A joint working group involving the state finance department, GST administration, and industry representatives could monitor refunds, address backlogs, and maintain liquidity for businesses. This collaboration would prevent cash flow problems from escalating into industrial slowdowns.

Ultimately, resolving IDS refund delays is about more than just cash—it is about building trust. Investors and entrepreneurs judge a state not only by incentives on paper but by the predictability and efficiency of its policies. If Punjab allows cash blockages and discriminatory exclusions to continue, it risks losing credibility as a reliable destination for manufacturing and investment. Correcting this issue now will signal that the state is serious about supporting its industries and fostering a business-friendly environment.

By combining timely refunds, digital efficiency, and strong Centre–state coordination, Punjab can secure its industrial backbone, restore confidence among investors, and revive its manufacturing sector. The state, known as India’s food basket, has the potential to become a manufacturing hub, but only if it addresses the liquidity challenges faced by industries operating under IDS. Ensuring prompt GST refunds is not a concession—it is a necessary step to maintain economic growth, competitiveness, and investor trust.