Inverted Duty Structure

Subject – Economy

Context – Relook at inverted duty structure for textiles, the main agenda of GST Council

Concept –

An inverted duty structure comes up in a situation where import duties on input goods are higher than on finished goods.

- In other words, the GST rate paid on purchases is more than the GST rate payable on sales.

What is Inverted Duty Structure under GST?

Under GST, inverted duty structure means inputs (inward supplies) used are having a higher GST rate compared to the GST rate of finished goods (outward supplies).
In simple terms, it means the GST rate for raw materials has a higher tax rate whereas the GST rate on finished goods is lower.
When taxes on the final product is lower than the taxes charged on inputs, an inverse input tax credit gets accumulated that has to be refunded by the government in the majority of the cases. This has created revenue outflow for the government, forcing it to take a relook at its duty structure.

Why is it a problem?

Taxpayers who face an inverted duty structure will always have Input Tax Credit (ITC) in their GST electronic credit ledger even after paying off the output tax liability. This creates working capital issues for the taxpayers, as crucial resources remain blocked in the form of ITC. While the GST law provides the option to claim the unutilized ITC as a refund, there are other complications.
From the government’s standpoint, because of the current anomaly, many administrative-level issues have cropped up. A complicated refund process under GST creates additional compliance requirements and finally leads to more cost of compliance. This way, the inverted duty structure has caused refund-related issues under the GST regime.

To know more about it, please refer November 2021 DPN.