The Goods and Services Tax (GST) system in India was introduced to streamline indirect taxation by unifying multiple taxes into a single framework. However, one of the structural issues that has emerged under GST is the Inverted Duty Structure (IDS). This occurs when the tax rate on inputs (raw materials or services used in production) is higher than the tax rate on the output (final product or service). This imbalance creates difficulties for businesses, especially when claiming refunds for the excess Input Tax Credit (ITC).
What is Inverted Duty Structure?
In simple terms, Inverted Duty Structure in GST refers to a situation where the GST paid on inputs is more than the GST payable on outputs. For example, if a manufacturer pays 18% GST on raw materials but only charges 12% GST on the finished goods, the excess ITC accumulates.
This accumulated credit cannot be fully utilized and may lead to blocked working capital. To address this issue, the GST law provides a mechanism for refunding the unutilized ITC under certain conditions.
Legal Provisions under GST Law
The key legal provision related to IDS is found in Section 54(3) of the Central Goods and Services Tax (CGST) Act, 2017. It states:
"A registered person may claim a refund of any unutilized input tax credit at the end of any tax period, subject to such conditions and restrictions as may be prescribed."
The rule further clarifies that refund of unutilized ITC is allowed in cases where the credit has accumulated due to inverted duty structure, except for goods and services notified by the government.
Rule 89(5) of the CGST Rules, 2017 provides the formula for calculating the maximum refund amount in IDS cases:
Refund Amount = (Turnover of inverted rated supply × Net ITC ÷ Adjusted Total Turnover) – Tax payable on such inverted rated supply
Here:
Net ITC means input tax credit availed on inputs during the relevant period.
Turnover of inverted rated supply refers to turnover of goods/services attracting lower GST than their inputs.
Restrictions and Notifications
The government has notified certain goods and services for which refund under IDS is not permitted. These include:
Coal and lignite
Fabrics in the textile sector (specific cases)
Certain construction-related goods
Such notifications are issued under Section 54(3)(ii), restricting refunds in specific sectors to avoid revenue loss or tax planning abuses.
Conclusion
Inverted Duty Structure Refund poses significant challenges for industries like textiles, fertilizers, and renewable energy. While the refund mechanism helps address some of the burden, delays in processing and restrictive rules can create cash flow issues. Understanding the legal framework under Section 54(3) and Rule 89(5) is crucial for businesses to ensure compliance and claim eligible refunds efficiently.
As the GST regime evolves, stakeholders expect further rationalization of tax rates and simplification of refund procedures to reduce the impact of IDS and promote ease of doing business.
