Inverted Duty Structure vs. Normal Duty Structure in GST

Inverted Duty Structure


The Goods and Services Tax (GST) in India was designed to streamline the indirect tax system and remove cascading taxes. While the system has brought more transparency and efficiency, certain structural inconsistencies persist. One such issue is the Inverted Duty Structure (IDS), which contrasts with what is considered a normal or ideal duty structure.


Understanding the difference between Inverted Duty Structure and Normal Duty Structure is essential for businesses, tax professionals, and policymakers. In this blog, we will break down both concepts, highlight their implications, and explore how they affect manufacturing and trade.


What is a Normal Duty Structure in GST?

A normal duty structure occurs when the tax rate on input goods or services is equal to or lower than the tax rate on the final product or output supply. This alignment ensures that the input tax credit (ITC) is fully utilized against the output tax liability.


Characteristics of a Normal Duty Structure:

GST on inputs ≤ GST on outputs


No accumulation of unutilized ITC


Simplified compliance


Neutral effect on working capital


Encourages domestic manufacturing


Example:

Input goods: Raw materials taxed at 12%


Output goods: Final product taxed at 18%


In this case, the manufacturer pays 12% GST on inputs and collects 18% GST on output, using the ITC to offset the liability.


What is an Inverted Duty Structure in GST?

An Inverted Duty Structure in GST (IDS) refers to a scenario where the GST rate on input goods is higher than the rate on output supplies. This results in the accumulation of ITC, which cannot be fully utilized through normal set-off and often requires a refund.


Characteristics of Inverted Duty Structure:

GST on inputs > GST on outputs


Leads to unutilized ITC


Requires refund under Section 54(3) of the CGST Act


Delays in refund affect working capital


Often discourages domestic value addition


Example:

Input goods: Components taxed at 18%


Output goods: Finished product taxed at 5%


This mismatch leads to excess ITC, impacting cash flow and profitability unless refunds are timely claimed.


Key Differences Between Inverted and Normal Duty Structures



Feature

Normal Duty Structure

Inverted Duty Structure

Input GST Rate

Less than or equal to output GST

Higher than output GST

ITC Utilization

Full

Partial, with excess

Refund Required

Usually no

Yes, under Rule 89(5)

Impact on Cash Flow

Minimal

Can be significant

Compliance Burden

Low

High (due to refund process)

Common Sectors

Electronics, Automobiles

Textiles, Footwear, Fertilizers


Implications for Businesses

1. Working Capital Impact

Under a normal structure, ITC offsets liability fully, keeping cash flow intact.


IDS leads to delayed refunds, blocking working capital and hurting liquidity.


2. Administrative Burden

Refunds under IDS involve more compliance, reconciliations, and document submissions.


In contrast, a normal duty structure simplifies accounting and tax filings.


3. Competitiveness

IDS can make domestically manufactured goods costlier compared to imports.


A normal duty structure helps manufacturers stay competitive.


Government Response to IDS

Recognizing the problems caused by IDS, the GST Council has taken certain corrective measures:


Rationalization of rates in sectors like textiles and footwear


Restrictions on claiming IDS refunds for certain notified goods


Simplification of the refund application process under Form RFD-01


However, sector-specific issues still remain, and many businesses continue to experience cash flow challenges due to IDS.


Conclusion

The contrast between Inverted Duty Structure and Normal Duty Structure highlights a fundamental design issue in India’s GST system. While a normal duty structure supports ease of doing business, IDS creates cash flow constraints and increases the compliance burden.


Resolving Inverted duty GST refund is key to encouraging domestic manufacturing, reducing refund dependency, and achieving the broader goals of initiatives like Make in India and Atmanirbhar Bharat. Until then, businesses must carefully track their tax credits, understand refund rules, and plan their pricing and procurement strategies accordingly.

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