Refund of ITC on capital goods facing inverted duty likely soon

The Centre is actively exploring ways to allow refunds of unutilised input tax credit (ITC) on capital goods under the inverted duty structure (IDS), signalling a move towards rationalising credit flow for manufacturing sectors affected by inverted duty rates, a senior official told Business Standard.

- MONIKA YADAV

An IDS arises when the tax rate on inputs is higher than that on finished goods, leading to the accumulation of unutilised ITC - the tax paid on inputs that businesses can normally offset against their output liability.

"The government has the appetite and is examining how a refund of unutilised ITC on capital goods can be enabled under IDS," the official said, adding that a similar move for input services may take longer.

An email sent to the finance ministry remained unanswered until the time of going to press.

A second official concurred, observing that ITC is emerging as "the next big reform agenda before the government". He acknowledged that the current framework creates imbalances. "The fact that refunds of ITC on services and capital goods are not permitted under IDS is a structural distortion," the official said, adding that "this needs to be addressed".