How inverted duties mess up GST rate cuts

The current ITC refund mechanism does not take into account the GST paid on input services and capital goods.

- Bipin Sapra & Swati Saraf

Aligning rates, enabling refunds, and gradually moving toward a unified rate will give businesses certainty and foster long-term investment, explain Bipin Sapra & Swati Saraf

Why do inverted duties matter?

THE GST RATE reduction also brings a challenge: the inverted duty structure (IDS), where rates on input supplies exceed the rates on output supplies. This creates significant accumulation of Input Tax Credit (ITC).

While refunds exist, they are currently limited to ITC on inputs, excluding accumulation from input services and capital goods, leaving businesses with stranded credits and liquidity stress. The challenge is particularly acute for companies with a narrow product portfolio, where rates across most products have been reduced to 5%.

In contrast, companies with diverse product lines spanning 5% and 18% GST slabs can offset accumulated ITC against liabilities without restriction. This distinction is especially relevant for FMCG companies with limited versus extensive portfolios.

Sectors affected by IDS