Inverted Duty Structure (IDS): 5 Major GST Industry Issues

• Recently, the GST Council reduced rates on certain inputs to address the inversion problem, bringing some relief.
• However, gaps still remain, particularly for sectors where input tax rates are higher than output tax rates, leading to working capital blockages and refund-related issues.
• The Council is also working on legal amendments to streamline the refund process and reduce cash flow problems for industries.

Key Points: The inverted duty structure (IDS)

GST Structure Change:

GST now has a two-slab structure:

• 5% slab – for essential goods and raw materials.
• 18% slab – for final products.

Earlier, there was a 12% slab, which has now been removed.

Relief for Some Sectors:

• Reduction in GST rates for certain fertilizer inputs like sulphuric acid, nitric acid, and ammonia from 18% to 5%.
• This is expected to lower production costs for fertilizers.

Industries Still Facing Inversion:

Textiles, bicycles, tractors, fertilizers, and certain packaging materials are still facing IDS problems.

Example:

• Raw materials taxed at 18%.
• Final product taxed at 5%.
• This leads to discrepancies in tax rates and difficulties in processing refunds.

Refund Issues:

• Industries face delays and cash blockages due to complex refund procedures.

GST Council has proposed:

• Amending Section 54(6) of the CGST Act to allow 90% of the provisional refund to be issued within seven days.
• Streamlining refund mechanisms to prevent working capital shortages.

Concerns for Industries:

• High tax rates on inputs discourage production.
• Difficulty in claiming refunds adds to financial stress.
• Industries seek a streamlined and effective refund process to prevent funds from being tied up.

About Input-Output GST (Inverted Duty Structure):

An Inverted Duty Structure (IDS) occurs when the GST levied on inputs is higher than that applied to the final product.

• This causes businesses to pay more tax upfront, leading to unutilized Input Tax Credit (ITC).

Example:

• GST on raw material (input) = 18%
• GST on finished product (output) = 5%
• The company pays 18% initially, but only collects 5% from customers, creating an imbalance.

Impact:

• Excess ITC accumulation.
• Increased working capital requirement.
• Higher production costs.
• Slower refunds affecting business liquidity.

Way Forward:

• Reduce input GST rates or increase final product GST rates to balance tax rates.
• Simplify and speed up refund processes.
• Gradual phasing out of IDS by revising GST rates sector-wise.
• Digital solutions for real-time refund tracking to support industries.