The GST Council is poised to recommend alleviating measures for sectors beleaguered by the Inverted Duty Structure (IDS), including textiles, fertilizers, and leather. This structural anomaly, where input duties surpass output duties, precipitates a significant accumulation of input tax credit (ITC), imposing onerous cash flow constraints on businesses.
The pressing issue of IDS, which has long been a source of contention due to the complexities of refund calculations and ensuing litigations, is currently under rigorous scrutiny. The Group of Ministers (GoM), led by Uttar Pradesh’s Finance Minister Suresh Kumar Khanna, is tasked with devising rate rationalization strategies. Although their final report is pending, their interim recommendations from June 2022 advocate for measures to mitigate IDS in select sectors. The interim report highlights that the inability to refund accumulated ITC on services and capital goods escalates supply costs, thereby diminishing the competitiveness of Indian manufacturers against foreign imports. This blockage also incentivizes tax evasion and hampers India’s export market position.
The Committee posits that rectifying IDS would enable domestic manufacturers to fully utilize their tax credits on inputs, alleviating the consumer burden and enhancing the manufacturers’ operational viability. Despite withholding recommendations on items like utensils, tractors, and certain agricultural implements, the Committee anticipates providing clearer guidance, particularly regarding refund policies.
Harpreet Singh, Partner at Deloitte India, observes that previous GST Council attempts to address IDS by elevating GST rates on outward supplies have met with mixed reactions. While such increases aim to balance societal benefits and support consumer sectors, the approach has faced industry resistance. Consequently, the Council might now consider rectifying IDS in a manner that judiciously balances the interests of taxpayers and consumers alike.
Ankur Gupta, Practice Leader (Indirect Tax) at SW India, suggests several pragmatic solutions. Lowering GST rates on inputs to align them with finished product rates would curtail ITC accumulation and streamline credit flows within the supply chain. Another strategy involves rationalizing tax rates across raw materials, intermediates, and finished goods to establish an equitable tax framework. Additionally, expanding refund eligibility to include input services and prioritizing sector-specific relief for heavily impacted industries, such as textiles and fertilizers, could further ameliorate the IDS burden.
By adopting these measures, the GST Council could foster a more balanced and efficient tax structure, ultimately enhancing the global competitiveness of Indian manufacturers and ensuring a fairer distribution of tax burdens across the supply chain.