Several industry associations have approached the Finance Ministry, seeking urgent intervention by the GST Council to address long-standing issues in the inverted duty structure (IDS) under the Central Goods and Services Tax Act, 2017.

According to sources, the Finance Ministry is currently studying the demands submitted by industry stakeholders, with the proposals likely to be taken up for discussion in the next GST Council meeting.

Industry flags structural flaws in refund mechanism

At the core of the representation is the demand to fix anomalies in the input tax credit (ITC) refund framework under Section 54(3). Industry players argue that the current provisions restrict refunds largely to inputs, excluding input services and capital goods—despite these forming a significant portion of modern business costs, sources added.

This restriction, sources say, has led to substantial accumulation of unutilised credits across sectors, locking up working capital and distorting cost structures.

Push to widen refund eligibility

Industry bodies have sought an amendment to allow refunds of ITC on input services and capital goods, in addition to inputs. They have also called for the removal of the condition that permits refunds only when the tax rate on inputs exceeds that on output supplies, claimed sources in the know of the representations.

Instead, industry is pushing for a broader framework that allows refunds even when inversion arises due to structural rate changes or high input service costs—an increasingly common scenario under GST, sources said.

Demand to redefine ‘Net ITC’ and fix formula

Another key ask is to broaden the definition of “Net ITC” to include inputs, input services, and capital goods, ensuring full refund eligibility rather than partial or capped refunds, sources say.

Industry has also flagged issues with the current refund formula, arguing that it artificially reduces refund amounts and does not align with the actual ITC used in business operations. A revamp of the formula has been sought to better reflect real tax incidence, sources added.

Call for procedural simplification

Beyond structural changes, industry associations have highlighted procedural bottlenecks in the refund process. They are seeking clearer rules for invoice correlation to streamline claims, reduce disputes, and cut down delays, sources say.

Simplifying compliance, they argue, would help lower litigation and improve ease of doing business.

Multiple sectors impacted

The inverted duty structure issue is particularly acute in sectors such as insurance (life and health), pharmaceuticals, FMCG, packaged food and services ecosystem, edible oil, and e-commerce sellers—industries that typically have high input service costs and complex supply chains, sources said.

Wider economic concerns

Industry stakeholders have also flagged broader macroeconomic risks, warning that the current framework increases the cost of production, weakens export competitiveness, and leads to significant working capital blockage, said sources privy to the representations.

Industry has argued that unless corrected, the issue could dilute the impact of government initiatives such as Production Linked Incentive scheme and Make in India, while adding to compliance burden for businesses.

With the Finance Ministry now examining these demands, all eyes are on the upcoming GST Council meeting, where a potential course correction on the inverted duty structure could be on the agenda.

Source: CNBC Tv 18