Setting the Stage: GST 2.0 and New Rate Announcements

Prime Minister Narendra Modi’s announcement of GST 2.0 during the 79th Independence Day address has set the stage for one of the most significant overhauls of India’s indirect tax system since its launch in 2017. The reform is positioned as a move towards simplification, efficiency, and greater ease of doing business, addressing structural issues that have long challenged industries.

Building on this, the GST Council meeting scheduled on 3rd and 4th September is expected to bring key rate rationalization as part of the broader rationalisation drive. These changes are more than just adjustments in tax slabs; they could play a crucial role in fixing persistent challenges such as the Inverted Duty Structure (IDS), which has been a major pain point for businesses across sectors.

What Is an Inverted Duty Structure?

An inverted duty structure occurs when the GST rate on inputs (raw materials or services) is higher than the rate on the final product.

Example:

• Inputs taxed at 18%
• Finished goods taxed at 12%

The result? Excess Input Tax Credit (ITC) that businesses cannot fully utilise. Over time, this leads to blocked working capital and a reliance on refund mechanisms.

Sectors such as textiles, footwear, fertilisers, electronics, renewable energy equipment, and pharmaceuticals often find themselves struggling with IDS.

Why IDS Is a Challenge

1. Liquidity Crunch – Unused ITC locks up funds, creating working capital stress.
2. Eroded Profit Margins – Delayed or partial refunds directly affect profitability.
3. Pricing Distortions – Businesses either absorb the cost hit or increase product prices, impacting competitiveness.
4. Administrative Burden – Frequent refund claims and reconciliations add compliance pressure.
5. Discouraged Domestic Manufacturing – IDS can sometimes make local production less viable compared to imports.

Refunds Under IDS: The Current Mechanism

The GST law allows a refund of unutilised ITC under IDS, but certain conditions must be met:

• Refunds are available only if the rate of tax on inputs is higher than the rate on output supplies.
• The taxpayer must have filed valid GST returns (GSTR-1 and GSTR-3B) for the relevant tax period.
• Refunds can be claimed only for input goods – not for input services or capital goods.
• Supplies must not fall under the negative list of refunds (e.g., goods subject to export duty, or where drawback of taxes has been claimed).
• The claim has to be filed within 2 years from the end of the relevant financial year in which the refund arises.
• Proper documentary evidence (invoices, turnover records, ITC ledgers) must be maintained to substantiate the claim.

The refund amount is calculated using the prescribed formula:

Refund Amount = (Turnover of inverted-rated supplies × Net ITC ÷ Adjusted Total Turnover) – Tax payable on inverted-rated supplies

While this framework exists, the limitations remain:

• Exclusion of input services and capital goods creates partial relief.
• The application process is compliance-heavy.
• Refund disbursals are often delayed, leading to a cash flow crunch.

Ongoing Concerns from Industry

Despite being a recognised issue, IDS continues to trouble businesses because:

• Refund processing is slow, sometimes taking months.
• The 12% slab has been a hotspot for disputes and mismatches, complicating compliance.
• Sectors like textiles and pharma have repeatedly raised the need for automatic refunds and inclusion of input services in claims.

How GST 2.0 Could Change the Game

The proposed GST 2.0 framework, along with the shift towards fewer tax slabs, could directly address IDS concerns. Potential benefits include:

• Alignment of rates between inputs and outputs, reducing accumulation of ITC.
• Simpler refund mechanisms or even automated processing to ease liquidity concerns.
• Lower compliance burden with fewer slabs and reduced classification disputes.
• Boost to consumption and competitiveness through more predictable pricing and smoother tax flows.

Preparing for the Change: What Businesses Should Do

• Evaluate exposure: Map out where input-output mismatches exist in your supply chain.
• Model cash flow impact: Simulate scenarios under revised rates to plan working capital.
• Strengthen refund documentation: Ensure records, reconciliations, and ITC claims are watertight.
• Stay connected with industry bodies: Collective representation often helps push policy refinements.

Closing Thoughts

The inverted duty structure has been a long-standing thorn in India’s GST framework. With GST 2.0 on the horizon and the Council set to meet on 3rd and 4th September, businesses and policymakers alike will be watching closely.

If reforms deliver on their promise, India could finally see a more neutral, transparent, and growth-oriented GST system. That would mean fewer blocked credits, reduced litigation, and a fairer environment for both producers and consumers.

GST 2.0 is not just a policy update. With GST 2.0, India has a genuine chance to resolve structural anomalies, strengthen compliance, and boost economic competitiveness.

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