The GST Council is poised to address the significant challenges posed by the Inverted Duty Structure (IDS) which has profoundly impacted sectors such as textiles, fertilizers, and leather. This intricate issue, characterized by higher duties on inputs compared to outputs, has led to the problematic accumulation of input tax credits (ITC), creating substantial cash flow burdens for businesses unable to effectively utilize these credits.
The IDS dilemma is currently under the scrutiny of a Group of Ministers (GoM), led by Uttar Pradesh’s Finance Minister, Suresh Kumar Khanna, who is spearheading efforts towards rate rationalization. While the group’s final recommendations are awaited, an interim report released in June 2022 highlighted the adverse effects of IDS on industries. The report elucidated that the non-refund of accumulated ITC on services and capital goods exacerbates supply chain costs, rendering Indian manufacturers and suppliers less competitive both domestically and internationally.
The GoM’s interim findings underscore the critical need for rectifying the IDS to prevent tax evasion and enhance the global competitiveness of Indian goods. By addressing the ITC blockage, domestic manufacturers would not only benefit from the utilization of tax credits on inputs, but the overall burden on consumers would also be alleviated. The Committee’s interim measures have not yet fully addressed sectors like utensils, tractors, and agricultural implements, but clarity is anticipated, particularly concerning refunds.
Industry experts have weighed in with potential solutions. Harpreet Singh, Partner at Deloitte India, notes that the Council has historically attempted to mitigate IDS by increasing GST rates on outward supplies, a strategy that has met with mixed reactions from the industry. Singh suggests that any rectification of IDS should consider the broader impact on taxpayers and consumers, aiming for a balanced approach that supports both.
Ankur Gupta, Practice Leader (Indirect Tax) at SW India, proposes lowering GST rates on inputs to align them with those on finished products, thereby reducing ITC accumulation and facilitating a smoother credit flow within the supply chain. Gupta also recommends rationalizing tax rates on raw materials, intermediates, and finished goods to establish a more balanced tax structure. He advocates for sector-specific relief, particularly for heavily impacted sectors like textiles, footwear, and fertilizers, to ensure targeted and effective mitigation of IDS impacts.
In conclusion, the GST Council’s deliberations on IDS relief are crucial for alleviating the financial strains on affected industries, enhancing the competitiveness of Indian manufacturers, and ultimately benefiting consumers. The proposed measures, if implemented thoughtfully, could streamline the tax credit system, reduce costs, and foster a more equitable tax environment.