Is Your Group's GST Credit Stuck? A New Rule May Free It

Many corporate groups in India face the same problem every month. One company in the group has GST credit sitting unused. A sister company in the same group pays GST in cash, even though the group as a whole has enough credit to cover it. A proposal now moving through the GST Council system could finally close this gap.

On 28 July 2026, reports confirmed that a key panel under the GST Council is reviewing an industry suggestion to allow transfer of unused input tax credit (ITC) between companies in the same corporate group. The same proposal also asks for GST exemption on intra-group corporate guarantees. If the GST Council approves it, this would be one of the biggest working capital reliefs for group companies since GST began in 2017.

This guide explains what the proposal covers, how it is different from the ITC transfer rules that already exist, what tax experts are saying, and what group companies should check right now.

Why Group Companies Are Asking for This Change

In most business groups, GST credit and GST liability do not line up neatly across entities. One unit may export heavily and build up unused credit. Another unit in the same group may sell mostly in the domestic market and pay GST in cash every month, even though the group has surplus credit sitting idle elsewhere.

Industry bodies have told the GST fitment committee that this mismatch hurts working capital. Cash gets locked up in one entity while credit stays unused in another. Tax experts say this also adds unnecessary compliance work, since group companies often make internal transactions purely to move funds around.

MS Mani, a partner at Deloitte India, has pointed out that intra-group GST payments create working capital inefficiency. He believes that in a competitive market, businesses need every possible efficiency, including how they manage GST payments across group entities.

Government officials familiar with the discussion say the change would not materially affect tax revenue, since the credit already belongs to the group. It would only change how efficiently that credit gets used.

The Two Models Under Discussion

Tax experts have suggested two different ways to solve this problem, and the fitment committee is expected to weigh both.

The first is often called the Canadian model. Under this approach, GST would simply not be charged on supplies made between closely related group companies. This removes the need for cash payment and credit claim between group entities in the first place.

The second is a pooling model. Here, related companies within a group would pool their GST credits into a single account. The group could then use this pooled credit to settle any group company's cash GST liability, instead of transferring credit company by company.

Both models aim to solve the same core problem: idle credit in one entity while another entity pays cash. The final design, if approved, will likely include safeguards to prevent misuse between entities that are not genuinely related.

Where the Proposal Stands Right Now

As of the last week of July 2026, this is only a proposal. The GST fitment committee is reviewing the suggestions from industry. Once the committee gives its recommendation, it will be placed before the full GST Council, the apex body that decides on GST rate and rule changes.

Sources familiar with the matter expect a GST Council meeting to take place in the coming weeks, though no confirmed date has been announced. Businesses should treat this as a proposal under review, not a rule they can act on today.

How ITC Transfer Works Today, Without This Proposal

Current GST law does allow ITC transfer between companies, but only in specific situations tied to business restructuring.

Section 18(3) of the CGST Act allows a registered person to transfer unutilised ITC to another entity in cases of sale, merger, demerger, amalgamation, lease, or transfer of business, as long as the specific liabilities are also transferred along with the business.

Rule 41 lays out the procedure for this transfer. The transferor company files Form GST ITC-02, and the transferee company must accept the details on the GST portal before the credit moves across. Rule 41A covers ITC transfer between two registrations of the same legal entity within the same state.

These provisions were built for one-time restructuring events. They do not cover a case where two separate, ongoing companies simply want to share credit because they belong to the same group. That is the exact gap the new proposal is trying to fill.

Courts Are Already Leaning in This Direction

A recent Bombay High Court ruling adds weight to the industry's case. In the Umicore Autocat India case, the court allowed a company to transfer unutilised ITC from Goa to Maharashtra after an amalgamation, even though the two entities were registered in different states.

The GST portal had initially rejected the transfer because the transferor and transferee were not in the same state. The court held that nothing in the GST law or rules actually bars this kind of interstate transfer during a genuine merger, and directed GSTN to process it.

This ruling does not cover the new proposal directly, since it deals with restructuring, not ongoing group operations. But it shows that both courts and policymakers are moving toward a more flexible reading of how ITC should move between related entities.

What This Could Mean for Your Business

If the GST Council approves this proposal, corporate groups could see three practical benefits.

Better working capital: Cash that is currently locked up because of credit mismatches across group entities could be freed up for actual business use, such as expansion or investment.

Fewer disputes: Many current GST disputes arise from artificial intra-group transactions created only to move credit around. A direct transfer or pooling mechanism could reduce this kind of litigation.

Simpler compliance: Finance teams managing multiple group entities would spend less time reconciling credit and cash positions across companies.

These benefits depend entirely on the final design the GST Council approves, including any safeguards added to prevent misuse. Businesses should not assume this change is final until the Council formally announces it.

How to Prepare Your Group Structure for This Change

There is no rule to apply yet, but group companies can still use this window to get their records ready.

Step 1: Map your ITC balances across every group entity. List which companies are sitting on surplus credit and which ones regularly pay GST in cash.

Step 2: Check your ownership structure. Note which of your group companies share common promoters, common ownership, or a common PAN, since these are the likely qualifying criteria under the proposal.

Step 3: Review your existing corporate guarantee arrangements between group companies. If the GST exemption on intra-group guarantees is approved, this could change how you structure future guarantees.

Step 4: Assign someone on your finance or compliance team to track GST Council meeting announcements, since the effective date and conditions will only be confirmed there.

Step 5: Talk to your GST advisor before making any structural changes based on this proposal. The final rules, once notified, may include conditions that are not yet public.

Corporate Guarantees and GST: The Other Half of the Proposal

The same industry submission also asks for an exemption on intra-group corporate guarantees. Under current rules, when one group company gives a corporate guarantee for another, the transaction is treated as a taxable supply and attracts 18% GST.

Businesses have argued that this tax adds cost to a transaction that has no real revenue impact for the government, since it happens entirely within the same group. If the GST Council accepts this part of the proposal, group companies could stop paying GST on guarantees they issue for each other.

Frequently Asked Questions

Q1. What is GST ITC transfer between group companies?

It refers to moving unutilised input tax credit from one company's electronic credit ledger to another company's ledger. Today this is allowed only during restructuring events like mergers and demergers. A new proposal may extend it to ongoing group operations.

Q2. Is GST ITC transfer between group companies allowed right now?

No. As of July 2026, GST law does not permit companies with common ownership to transfer ITC to each other unless they are undergoing a merger, demerger, or similar restructuring under Section 18(3).

Q3. How to transfer ITC in case of a merger or demerger?

The transferor company must file Form GST ITC-02 on the GST portal, declaring the unutilised credit balance. The transferee company then has to accept the details online before the credit is transferred into its ledger.

Q4. What is Form ITC-02 and how do I file it?

Form GST ITC-02 is the official form used to transfer unutilised ITC during a change in business constitution, such as sale, merger, demerger, or amalgamation. It is filed on the GST portal under the ITC section by the transferor, and the transferee must confirm acceptance for the transfer to complete.

Q5. What is the difference between Section 18(3) and the new proposal?

Section 18(3) allows ITC transfer only when a business is legally restructured, such as through a merger or demerger. The new proposal would allow transfer between companies that remain separate and continue normal operations, based only on common ownership or a common PAN.

Q6. How does the Canadian model for GST work?

Under this model, GST is not charged at all on supplies made between closely related group companies. Since no tax is charged, there is no need for one company to pay cash and claim credit from another within the same group.

Q7. What is the ITC pooling model being discussed?

In this model, group companies would pool their unused GST credit into a shared account. The group could then draw from this pool to settle the cash GST liability of any company within the group, instead of transferring credit one company at a time.

Q8. How to check if my group companies qualify as common PAN entities?

Check the Permanent Account Number (PAN) registered against each group company with the Income Tax Department. Companies sharing the same PAN structure, or under common promoter ownership, are the entities likely to qualify once the GST Council finalises the eligibility criteria.

Q9. When will the GST Council decide on this proposal?

There is no confirmed date yet. As of late July 2026, the proposal is with the GST fitment committee. Once the committee recommends it, the GST Council is expected to take it up at its next meeting, likely in the coming weeks.

Q10. Does this proposal cover interstate ITC transfer between group companies?

The current proposal does not clearly address this yet. Separately, the Bombay High Court has already allowed interstate ITC transfer in a merger case, which may influence how the GST Council frames rules for interstate group transfers going forward.

Q11. How are corporate guarantees between group companies taxed under GST today?

Corporate guarantees given by one group company for another are currently treated as a taxable supply and attract 18% GST. The new proposal asks the GST Council to exempt these intra-group guarantees from tax.

Q12. How to prepare my company for possible ITC transfer rules?

Start by mapping ITC balances and cash GST payments across all group entities. Identify which companies share common ownership, review your corporate guarantee structure, and speak to your GST advisor before making any changes based on the proposal.

Q13. What safeguards might the GST Council add to this proposal?

While the final safeguards are not public yet, such proposals typically include conditions like a minimum ownership threshold, common PAN verification, reporting requirements, and limits to prevent credit transfer between unrelated entities disguised as a group.

Q14. Will this proposal reduce GST litigation?

Tax experts believe it can. Many current disputes arise from artificial transactions created only to move credit between group entities. A direct transfer or pooling mechanism would remove the need for such transactions, which should lower related litigation over time.

Q15. How to stay updated on this proposal's progress?

Track official GST Council meeting outcomes on gst.gov.in and cbic-gst.gov.in, and follow updates from your GST advisor. Avoid relying on unofficial sources for the final rules, since only a GST Council notification makes any change legally binding.

Need Help Managing GST Credit Across Your Group Companies?

LegalDev's GST compliance team helps businesses track input tax credit, plan GST registration across states, and prepare for regulatory changes like this one.

Call +91-8588808388 or WhatsApp +91-72172 54194 to speak with our team.