'Working capital blocked': Industry flags GST inverted duty burden in letter to FM Sitharaman

Industry stakeholders have raised concerns over the inverted duty structure under the Goods and Services Tax, flagging refund limitations and working capital stress in a representation to Finance Minister Nirmala Sitharaman, who also chairs the GST Council.

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In a letter, Empower India Director General Krishnaswami Giri said the current framework continues to create inefficiencies despite recent revisions. “We write on behalf of industry stakeholders to highlight the continued challenges arising from the Inverted Duty Structure (IDS) under the Goods and Services Tax (GST) framework, and to seek policy intervention to address structural inefficiencies impacting multiple sectors of the economy.”

The inverted duty structure arises when the rate of tax on inputs exceeds that on output supplies, leading to accumulation of unutilised input tax credit. While the refund mechanism was designed to address this, the industry has pointed to gaps in its implementation.

“The IDS refund mechanism was envisaged to mitigate hardship in cases where the rate of tax on inputs exceeds that on output supplies, resulting in accumulation of unutilized input tax credit (ITC). While recent revisions to the refund formula following recommendations of the GST Council are acknowledged as a positive step, certain structural limitations continue to restrict the effectiveness of the framework.”

A central concern is the exclusion of input services and capital goods from refund eligibility. “A key concern is the continued exclusion of input services and capital goods from the scope of refunds under Section 54(3) of the CGST Act. As a result, taxpayers remain eligible for refunds only where inversion is attributable to inputs, even though input services and capital goods form an integral part of modern supply chains.”

The letter adds that the definition of “Net ITC” does not account for input services, reducing refund amounts. “Additionally, the definition of ‘Net ITC’ continues to exclude input services, thereby reducing the quantum of refunds despite their role in discharging output tax liabilities.”

According to the representation, these limitations have led to the accumulation of credits and liquidity stress. “These limitations have led to persistent accumulation of unutilised credits, resulting in working capital blockages, increased cost of doing business, and inefficiencies in the credit chain. The issue is particularly acute for MSMEs and export-oriented businesses, where liquidity constraints directly affect operations and growth."

Industry flagged that the inverted duty structure has broader economic implications. "It increases the effective cost of production and undermines the competitiveness of Indian manufacturers in global markets. This runs counter to the objectives of key national initiatives such as Make in India and the Production-Linked Incentive schemes, which seek to promote domestic manufacturing and exports.”

The representation highlights that interpretational issues linked to GST circulars have added to compliance burdens. “Further, interpretational ambiguities arising from GST circulars related to IDS refunds, particularly in cases involving rate changes over time, have resulted in inconsistent practices and increased litigation."

Following the rollout of GST 2.0 in September 2025, the industry said inversion has deepened in several sectors.

In food processing, finished goods were moved from 12% to 5%, while inputs such as packaging, cold storage, and advertising continue to attract 18%. In renewable energy, solar modules and wind turbines are taxed at 5%, but inputs such as steel, glass, and engineering services are taxed at higher rates. In textiles and footwear, inversion persists in segments where raw materials such as synthetic fibres are taxed more than finished garments.

The letter calls for expanding refund eligibility. “It is recommended that the scope of the IDS refund mechanism be expanded to include cases where inversion arises due to input services and capital goods, in addition to inputs.”

It also seeks amendments to the law and procedural changes. “It is further recommended that Section 54(3) of the CGST Act be amended to allow refund of accumulated ITC on account of input services and capital goods, along with a corresponding revision in the definition of ‘Net ITC’ to reflect the full spectrum of business procurements.”

Industry has also asked for simplification of processes to reduce compliance burden and streamline the refund process, particularly for MSMEs. "In addition, a clarificatory circular may be issued to address interpretational ambiguities, especially in cases where rate differentials arise due to changes over time, and to ensure consistent implementation across jurisdictions."

The representation concludes that addressing the issue would improve the tax framework and ease liquidity constraints.