GST Council Rate Cuts Reduce Inverted Duty Structure Refunds

Impact of  56th Meeting of GST Council on Inverted Duty Structure (IDS) Refunds – A Closer Look

Summary: The 56th GST Council Meeting introduced structural changes aimed at reducing working capital blockages caused by the Inverted Duty Structure (IDS), where the GST rate on inputs exceeds the rate on output supplies. IDS leads to the accumulation of unutilized Input Tax Credit (ITC), which businesses may claim as a refund under Section 54(3). Historically, these refunds, constituting nearly 22% of total GST refunds, faced bureaucratic hurdles, delays, and rejections despite the statutory 60-day sanction period, negatively impacting liquidity. The Council responded by undertaking rate rationalization, notably reducing rates on over 100 goods across sectors like textiles, agriculture, and renewable energy to directly minimize future IDS occurrences. Furthermore, a proposal for 90% provisional refunds offers substantial relief, promising faster cash flow. Although rate corrections will significantly reduce compliance friction, businesses must proactively monitor their ITC post-rate changes and ensure accurate product classification to manage residual IDS scenarios, particularly in specific sectors like FMCG and solar energy.

Background

An Inverted Duty Structure (IDS) occurs when the GST rate on inputs is higher than the GST rate on output supplies. This leads to accumulation of unutilised Input Tax Credit (ITC) in the electronic credit ledger. To claim this refund, businesses must file an online refund application.

Apart from exporters and SEZ suppliers, IDS refunds form nearly 22% of total GST refunds. However, the current refund process takes up to 60 days and often faces delays or rejections because of officers’ difficulties in understanding IDS claims. This leads to working capital blockages for businesses, which ultimately affects consumers as well.

Existing Law

Under Section 54(3) of the CGST Act read with Rule 89 of the CGST Rules, 2017:

• A registered person may claim a refund of unutilised ITC at the end of any tax period, provided that:

1. The claim relates to zero-rated supplies without payment of tax; or

2. ITC accumulation is due to input tax being higher than output tax (except for nil-rated or exempt supplies, and certain notified goods/services).

Refunds are to be sanctioned within 60 days from application. In practice, however, IDS refunds face scrutiny, additional queries, and frequent delays, leaving funds stuck with the department.

GST 2.0 – Key Changes

1. Correction of inverted duty structures by revising GST rates to minimise IDS situations.

2. Over 100 goods saw rate reductions, particularly in textiles, agriculture products, and renewable energy.

3. These changes are aimed at reducing refund dependency and making GST more business friendly.

Analysis

• IDS refund processing under Rule 89 remains cumbersome and causes delays.
• Rate rationalisation will reduce IDS cases significantly, but some industries (like electric operating machinery and bicycle manufacturers) may still face IDS situations.
• A proposal for 90% provisional refunds is a major relief for businesses, ensuring faster liquidity and better working capital management.
• However, refunds are not available when input and output are the same goods but taxed differently at different times.

Recommendations for Trade/Business

1. Cross-verify product classification and applicable GST rates with latest notifications to avoid disputes.

2. Analyse ITC accumulation post rate changes to identify possible IDS impacts early.

3. Sectors such as FMCG, pharma, textiles, solar, and renewable energy should pay special attention to IDS scenarios.

4. Proactively file IDS refund claims to avoid working capital blockages.

Conclusion:

The GST Council’s steps towards correcting IDS and simplifying refunds are welcome. However, industries must remain vigilant, ensure compliance, and optimise ITC management. Provisional refund mechanisms and reduced IDS cases will help ease cash flow, strengthen ease of doing business, and reduce litigation.

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