GST Inversion Eases, but Input-Output Rate Gaps Persist: Industry's Ongoing Concerns
The recent Goods and Services Tax (GST) reforms, effective from September 22, 2025, introduced a simplified two-tier rate structure of 5% and 18%, aiming to address the inverted duty structure (IDS) that has long plagued various industries. While these changes have provided relief to many sectors, significant gaps between input and output tax rates remain a pressing concern for businesses, particularly Micro, Small, and Medium Enterprises (MSMEs).
Understanding the Inverted Duty Structure
An inverted duty structure occurs when the tax rate on inputs (raw materials or services) is higher than the tax rate on the final product. This imbalance leads to the accumulation of unutilized Input Tax Credit (ITC), which businesses cannot offset against their output tax liabilities. Consequently, companies face liquidity challenges as working capital gets blocked, impacting cash flows and operational efficiency.
Impact on Industries
Despite the GST rate rationalization, several sectors continue to grapple with the inverted duty structure:
Automotive Sector: Steel, a primary input, is taxed at 18%, while bicycles and e-bicycles attract a 5% GST rate.
Agriculture: Certain inputs for tractors remain at 18%, and the subsidy on fertilizers reduces the output price, leading to inversion.
Pharmaceuticals: Domestic manufacturers face challenges as the inverted duty structure puts them at a disadvantage compared to importers of finished formulations.
Insurance Sector: The sector prefers a 5% GST on health and life insurance over nil GST, as the latter would eliminate the ability to claim ITC, increasing operational costs.
Government Measures and Industry Response
To mitigate the adverse effects of the inverted duty structure, the government has introduced provisional refunds for accumulated ITC. Under the new provisions, 90% of refund claims under the inverted duty structure will be sanctioned provisionally, similar to zero-rated exports. However, delays in processing these refunds continue to strain businesses. Industry leaders have emphasized the need for faster refund mechanisms to maintain industrial viability.
Challenges in Refund Processing
The refund process remains a significant bottleneck. Manufacturers report delays of up to six months in receiving refunds, leading to blocked capital and increased financial strain. This prolonged delay not only affects cash flow but also discourages domestic manufacturing, as businesses find it challenging to compete with imports that do not face similar tax burdens.
Future Outlook
While the GST reforms have addressed some aspects of the inverted duty structure, the persistent gaps between input and output tax rates require further attention. Industry stakeholders urge the government to consider a more balanced approach in tax rate structuring and expedite the refund process to alleviate the financial strain on businesses.
Frequently Asked Questions (FAQs)
Q1: What is an inverted duty structure (IDS)?
An inverted duty structure occurs when the tax rate on inputs is higher than the tax rate on the final product, leading to the accumulation of unutilized Input Tax Credit (ITC).
Q2: How does IDS affect businesses?
IDS leads to blocked working capital as businesses cannot offset the accumulated ITC against their output tax liabilities, impacting cash flows and operational efficiency.
Q3: What measures has the government introduced to address IDS?
The government has introduced provisional refunds for accumulated ITC, allowing businesses to claim 90% of their refund claims under IDS provisionally.
Q4: Are there any sectors still facing challenges due to IDS?
Yes, sectors such as automotive, agriculture, pharmaceuticals, and insurance continue to face challenges due to the inverted duty structure.
Q5: What is the industry's response to the current GST reforms?
Industry leaders have welcomed the reforms but emphasize the need for faster refund mechanisms and a more balanced approach in tax rate structuring to alleviate financial strain.
Published on : 8th September
Published by : Selvi
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