How Inverted Duty Structure Affects Your Business



The Goods and Services Tax (GST) system, introduced to simplify and streamline India's taxation process, has benefited many sectors. However, exporters often face a challenge with the Inverted Duty Structure (IDS) under GST, where the input tax on goods or services they purchase is higher than the tax on their exported goods or services. Fortunately, GST laws allow exporters to claim refunds on this unutilized Input Tax Credit (ITC), providing a solution to this issue. In this blog, we’ll explore how the inverted duty structure affects exporters and how they can benefit from GST refunds.


What is the Inverted Duty Structure (IDS)?

The inverted duty structure occurs when the GST rate on inputs (raw materials, services, or goods purchased) is higher than the GST rate on output supplies (the finished goods or services provided to customers). This creates an excess of Input Tax Credit (ITC), which businesses cannot utilize because there is no output tax liability to offset it against.


For example, consider a manufacturer who buys raw materials (like fabric for garments) taxed at 18% GST but sells the finished garments at a lower GST rate of 5%. The manufacturer ends up with an excess of ITC, which cannot be used directly. Similarly, exporters face the issue of paying higher GST on their inputs but are unable to use this credit since exports are zero-rated under GST.


Recommended: GST Refund for Exporters 


How Does the Inverted Duty Structure Affect Exporters?

Exporters benefit from the zero-rated supply provision, meaning the goods or services they export are exempt from GST. While this reduces their GST liability on the output, it also leads to an issue: exporters cannot utilize the input tax credit accumulated on purchases (which is usually higher due to the inverted duty structure). This excess ITC essentially gets blocked and impacts the cash flow of exporters, forcing them to tie up working capital.


The major concerns faced by exporters due to IDS include:


Accumulation of unutilized ITC that cannot be offset against output tax, affecting liquidity.

Cash flow issues as input tax paid on materials or services can’t be recovered immediately.

The working capital burden of maintaining business operations without immediate access to the credit.

How Can Exporters Claim GST Refunds for Inverted Duty Structure?

To address this issue, GST laws allow exporters to claim refunds for the unutilized ITC under the inverted duty structure. Here’s a step-by-step guide on how exporters can claim the refund:


Step 1: Check Eligibility

First, ensure you are eligible for the refund:


You must be an exporter of goods or services.

The ITC on your inputs must be higher than the GST on your output supplies, leading to excess ITC.

Step 2: File GST Returns

Ensure that your GST returns (GSTR-1 and GSTR-3B) are filed accurately and on time. The refund process depends on having filed all the necessary returns correctly.


Step 3: Submit Refund Application (GST RFD-01)

To apply for the refund, you need to fill out the GST RFD-01 form on the GST portal. Along with the form, submit the following documents:


Export invoices

Bills of entry (for export)

Tax invoices for your input purchases

Proof of tax paid on inputs

Step 4: Refund Processing

Once submitted, the tax authorities will verify your refund application and documents. If there are any discrepancies or missing documents, they may ask for clarification.


Step 5: Receive Refund

Upon successful verification, the refund will be processed, and the excess ITC will be credited to your bank account. Refunds are typically credited within a few weeks, though this may vary.


When it comes to GST refunds, MYGST is here to help streamline the process. If you're dealing with the Inverted Duty Structure (IDS) or any other refund situation, MYGST offers an easy-to-use platform to simplify your GST refund claims.

With tools like the GST Refund Calculator, MYGST helps you quickly estimate your refund eligibility. Access the platform today to stay informed and ensure a smooth GST refund experience.


Challenges in the Refund Process

While the process of claiming GST refunds under the inverted duty structure is designed to ease financial strain, exporters often face challenges, such as:


Incomplete documentation: Refunds can be delayed or rejected if supporting documents like export invoices or tax receipts are missing.


Mismatch between purchase and sale data: Discrepancies between the details in your GST returns and actual purchases can result in delays.


Refund rejections: Refund claims can be rejected due to errors in the application or insufficient supporting evidence.

To avoid these challenges, ensure that your documentation is complete, your GST returns are filed accurately, and all information aligns correctly.


Also Read: GST Refund Claim Process  


Conclusion

For exporters, the inverted duty structure can create cash flow issues by trapping excess ITC. However, GST refunds offer a way to recover these unutilized credits, improving liquidity and easing the burden of blocked working capital. Understanding the process and ensuring accurate documentation can make the refund process smoother. If you're unsure or face difficulties in claiming your GST refund, it’s advisable to consult a GST expert to navigate the complexities and ensure timely refunds.


By leveraging GST refunds, exporters can reduce financial strain and maintain their competitive edge in the global market.

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