Industry Urges Govt to Fix GST Inverted Duty Structure

Several industry associations have approached the Finance Ministry, calling for urgent intervention by the GST Council to resolve persistent challenges arising from the inverted duty structure (IDS) under the Central Goods and Services Tax Act, 2017. The issue, which has long troubled multiple sectors, is now under active consideration by the Ministry, with discussions likely in the upcoming Council meeting.

Finance Ministry Examining Industry Proposals

According to sources, the Finance Ministry is currently reviewing detailed representations submitted by various industry bodies. These proposals focus on structural and procedural changes in the GST framework, particularly concerning the refund mechanism for input tax credit (ITC).

The matter is expected to feature prominently in the next GST Council meeting, raising hopes of a policy-level resolution to a problem that has significantly impacted business cash flows.

Core Concern: Flaws in ITC Refund Mechanism

At the heart of the industry’s concerns lies the refund framework under Section 54(3) of the CGST Act. At present, refunds of unutilised ITC are largely restricted to inputs, excluding input services and capital goods.

Industry stakeholders argue that this limitation is outdated and misaligned with modern business realities, where input services—such as logistics, digital infrastructure, and professional services—form a substantial portion of operational costs.

As a result, companies across sectors are facing a growing accumulation of unutilised tax credits, leading to working capital being locked up and distortions in overall cost structures.

Demand to Expand Scope of Refunds

To address these challenges, industry associations have proposed expanding the scope of ITC refunds to include input services and capital goods, in addition to inputs.

They have also called for the removal of the existing condition that allows refunds only when the tax rate on inputs exceeds that on output supplies. According to stakeholders, inversion today often arises not just from rate differences but also due to structural factors such as high service costs or changes in tax rates.

A broader and more flexible framework, they argue, would better reflect the realities of GST implementation.

Redefining ‘Net ITC’ and Revising Formula

Another major demand is to redefine “Net ITC” to include all components—inputs, input services, and capital goods—so that businesses can claim full refunds rather than partial amounts.

Industry has also raised concerns about the current refund calculation formula, stating that it artificially suppresses refund amounts and does not accurately represent actual tax incidence. A revision of the formula has been proposed to ensure a more transparent and equitable system.

Push for Procedural Simplification

Beyond structural reforms, stakeholders have highlighted procedural bottlenecks in the refund process. They have urged the government to introduce clearer guidelines for invoice matching and correlation to streamline claims.

Simplifying compliance procedures, they say, would reduce disputes, minimise delays, and lower litigation, thereby improving the overall ease of doing business under GST.

Multiple Sectors Bearing the Impact

The inverted duty structure has particularly affected sectors such as insurance, pharmaceuticals, FMCG, packaged foods, edible oil, e-commerce, and the broader services ecosystem. These industries typically have high input service costs and complex supply chains, making them especially vulnerable to credit accumulation.

Broader Economic Implications

Industry representatives have also flagged wider economic concerns, warning that the current system increases production costs, weakens export competitiveness, and strains working capital cycles.

They caution that unless corrective measures are taken, the issue could undermine flagship government initiatives such as the Make in India and the Production Linked Incentive scheme, while adding to the compliance burden on businesses.

Awaiting GST Council Action

With the Finance Ministry now actively examining these demands, attention is firmly on the upcoming GST Council meeting. Industry stakeholders are hopeful that a comprehensive review of the inverted duty structure and ITC refund framework will lead to meaningful reforms and long-awaited relief.