The Goods and Services Tax (GST) Council is intensifying its efforts to resolve inverted duty structures across multiple sectors, following the significant tax rate reductions implemented in September. This development comes as authorities work to streamline India's tax system and address long-standing industry concerns.
What Are Inverted Duty Structures?
Inverted duty structures represent a critical flaw in the taxation system where raw materials face higher taxation than finished products. This imbalance creates multiple challenges for businesses, including distorted pricing mechanisms, severe working capital constraints, and prolonged refund procedures that often lead to legal disputes.
The government had previously estimated that annual refund claims resulting from inverted duty structures amount to approximately ₹30,000 crore, highlighting the substantial financial impact on businesses and the economy.
Recent Progress and Current Focus
During the September 3 GST Council meeting, several inverted tax structures were successfully addressed through rate reductions on various goods. The Council lowered tax rates on fertilizers, textiles, and bicycles, providing immediate relief to these sectors.
Currently, the GST Council has identified additional sectors requiring attention, including specific railway components, metal ores and concentrates, and water pumps. The textile industry, which received partial relief in September, remains under review for complete resolution of duty inversion issues.
Ministerial Committees Driving Reforms
Two key ministerial groups are spearheading the tax reform initiatives. A committee led by Bihar Deputy Chief Minister Samrat Chaudhary has made substantial progress in correcting inverted duty anomalies across various industries.
Simultaneously, another group under Goa Chief Minister Pramod Sawant is examining GST structure issues in the real estate sector, particularly focusing on taxation aspects of development rights transfers.
Implementation Timeline and Future Outlook
While concrete measures may require additional deliberation time, the next GST Council meeting is anticipated before February 2026. This meeting will likely occur around or after the Union Budget FY27 consultations, scheduled for December between Union Finance Minister Nirmala Sitharaman and state finance ministers.
The upcoming Council session will evaluate revenue implications from the substantial tax cuts effective from September 22 and consider fresh recommendations for addressing remaining inverted duty challenges.
Expert Perspectives and Industry Impact
Tax professionals have welcomed the recent GST reforms while highlighting ongoing concerns. Amit Maheshwari, Tax Partner at AKM Global, emphasized that many businesses accumulated input tax credits at previous higher rates and suggested transitional relief measures.
Abhishek Jain, Indirect Tax Head at KPMG India, noted that businesses moving from 12% to 5% GST face working capital challenges due to higher input service taxes. Meanwhile, R. Muralidharan, an indirect tax expert, advocated extending refund mechanisms to include input services and capital goods.
The GST Council has already implemented a provisional refund system, allowing 90% of inverted duty refund claims from November 1, based on comprehensive data analysis and risk assessment.
