Policy Challenges for Inverted Duty Structure (IDS) Refunds

Policy Challenges for Inverted Duty Structure (IDS) Refunds

The article discusses the significant policy and legal challenges faced by manufacturers seeking refunds for accumulated Input Tax Credit (ITC) under the Inverted Duty Structure (IDS) in the GST regime, where the tax rate on inputs is higher than the tax rate on the final output product.

Key Policy and Legal Hurdles

• Restriction on Capital Goods ITC: The most substantial challenge is the existing legal provision that restricts the refund of ITC accumulated on capital goods. The GST law currently allows IDS refunds only for inputs and input services, ignoring the tax paid on essential machinery and equipment. This disproportionately impacts capital-intensive sectors.
• Exclusion of Input Services: While manufacturers rely heavily on services (like consulting, engineering, and logistics) to produce goods, disputes persist over the full eligibility of ITC accumulated on input services for refund under the IDS mechanism.
• Complex Formulae: The refund calculation is based on a complex and rigid formula defined in the GST Rules. This formula often fails to accurately reflect the actual tax burden, resulting in the sanctioned refund amount being less than the actual accumulated ITC, leading to continued financial blockage for businesses.
• Working Capital Strain: The core challenge IDS presents is the blocking of working capital. For affected industries, a significant portion of their funds remains locked up with the government as unutilized credit, severely impacting their liquidity and ability to scale operations.

Industry Demand

The industry consistently demands an amendment to the GST Act to allow the refund of ITC accumulated on capital goods, arguing that the current restriction violates the fundamental principle of GST—a seamless flow of credit up to the final consumer.