The Central government is moving to address a long-standing “structural distortion” in the GST regime by considering a proposal to allow the refund of unutilised Input Tax Credit (ITC) on capital goods for businesses operating under the Inverted Duty Structure (IDS).
What is the Problem?
The Inverted Duty Structure (IDS) occurs when the GST rate on inputs (raw materials) is higher than the GST rate on finished goods.
- Currently, GST law allows businesses to claim a refund of unutilised ITC accumulated on inputs (raw materials) in IDS cases.
- However, the refund is not permitted for ITC accumulated on input services and capital goods (like machinery), even though these have higher taxes. This results in “blocked credits” and severely strains the working capital and liquidity of manufacturing and export-oriented sectors.
The Proposed Solution
Senior officials indicate that the government is actively exploring mechanisms to enable the refund of unutilised ITC on capital goods under IDS.
- This move is seen as the “next big reform agenda” to rationalize the credit flow and correct a key structural imbalance in the tax framework.
- While the refund for capital goods is being prioritized, a similar move for input services may take longer.
Industry Reaction
Industry experts have welcomed the government’s openness but insist on a comprehensive approach:
“It’s a welcome step that the government is looking to allow refunds of unutilised ITC on capital goods under IDS. But refunds of ITC on input services should also be considered simultaneously, as they directly impact working capital.”
Experts highlight that allowing refunds for input services would provide an immediate ease to cash flow strain, while the change for capital goods would correct the structural imbalance over time.
Timeline for Implementation
Officials cautioned that the proposal is unlikely to be implemented immediately. The current focus is on allowing the recently launched GST 2.0 framework to stabilize before introducing major new policy changes.
Would you like me to elaborate on the difference between ITC on ‘inputs,’ ‘input services,’ and ‘capital goods’ under GST?
