In a significant move to overhaul the Goods and Services Tax (GST) regime, the Finance Ministry is tackling the problem of inverted duty structures—a tax mismatch that has long plagued businesses and led to higher costs for consumers.
What’s the Problem?
An inverted duty structure occurs when the tax rate on raw materials (inputs) is higher than the tax rate on the final product (output).
For example, a business might pay 12% GST on raw materials but only collect 5% GST on the finished goods it sells. This creates a buildup of Input Tax Credit (ITC)—the tax a business pays on its purchases. Since the tax collected on sales is less than the tax paid on purchases, the business can’t fully claim its ITC, leaving a large amount of money blocked.
This not only ties up a company’s working capital but also increases the overall cost of a product. In many cases, these costs are passed on to consumers.
How the New GST Regime Will Help
The government plans to fix this by aligning the tax rates on inputs and outputs. This could mean either lowering the tax on raw materials or raising the tax on final products to create a more balanced system.
By correcting this imbalance, businesses will see a significant reduction in their piled-up ITC. The benefits are twofold:
- For Businesses: Improved cash flow and freed-up working capital can be reinvested into operations, leading to greater efficiency and innovation.
- For Consumers: Businesses can pass on these savings, leading to lower prices, especially for essential goods. This change is expected to have a positive impact on sectors like textiles and fertilizers.