NEW DELHI: As the GST Council convenes for a crucial meeting on September 3rd and 4th, where a major rate rationalization is on the agenda, a chorus of industry voices is calling for a resolution to the persistent problem of the inverted duty structure (IDS).
An inverted duty structure occurs when the taxes paid on inputs (raw materials and services) are higher than the tax levied on the finished product. This leads to an accumulation of unutilized Input Tax Credit (ITC), blocking crucial working capital for companies.
Edible oil industry sounds alarm
The Indian Vegetable Oil Producers’ Association (IVPA) has issued an urgent memorandum to the government, highlighting a severe strain on the sector since July 2022, when the GST Council restricted refunds of accumulated ITC under IDS.
"While edible oil is taxed at 5% GST, most input materials such as packaging, chemicals, and processing materials attract GST at 12–18%, leading to substantial accumulation of unutilized ITC," the IVPA stated. The association warned that this is causing a working capital crisis, especially for MSMEs, disincentivising investment, and potentially driving up consumer prices.
"Higher costs due to unrecovered ITC are passed on to consumers, potentially pushing prices upward and may drive lower-income consumers toward unsafe, adulterated, or reused edible oils," the IVPA cautioned. They have urged the Council to rescind the 2022 restriction and ensure parity with other essential items like butter and ghee, which continue to receive refund benefits.
EV sector seeks tax parity
The electric vehicle (EV) industry is facing a similar hurdle. Chetan Maini, Co-founder of SUN Mobility, pointed out a critical mismatch: "While EVs attract just 5% GST, standalone batteries are taxed at 18%, a mismatch that creates an inverted duty structure and adds to the cost of OEMs and infrastructure players."
Maini also noted that battery swapping and charging services are taxed at 18%, making adoption expensive for key user groups like gig workers. He called for rationalizing GST on batteries and related services to 5% to improve affordability and accelerate adoption.
Insurance sector highlights structural issue
The insurance sector welcomed the proposed reduction of GST on premiums from 18% to 5%, calling it a "progressive and customer-centric step" that will improve affordability and penetration.
However, Rakesh Jain, CEO of Reliance General Insurance, flagged an underlying structural issue. "A key concern is the inverted duty structure, which leads to accumulation of unutilised input tax credits, as insurers are unable to offset taxes paid on many input services that attract higher GST rates," he said. He urged policymakers to address this inefficiency to unlock the full benefits of the rate reduction for the industry.
As the GST Council deliberates on simplifying rates, the pressing demand from diverse industries is clear: any reform must address the crippling inverted duty structure to ensure the tax system fuels growth rather than stifling it.