© The Indian Express Pvt Ltd
Tags:
Journalism of Courage
The broad two-slab rate structure of 5 per cent and 18 per cent in the new GST regime may have addressed the inverted duty structure across a wide range of products, but the removal of the 12 per cent slab has created significant gaps between certain inputs taxed at 18 per cent and final products taxed at 5 per cent, raising concerns over capital blockage.
While the industry has found relief in a large section of the value chain, items such as bicycles, tractors, fertilisers and some types of textiles continue to face inverted duty structure as raw materials and inputs face higher tax than output. For instance, steel continues to attract 18 per cent GST while final products like bicycles and e-bicycles are in the 5 per cent GST slab. Similarly, while the government worked towards removing the inverted duty structure (IDS) anomalies in most sectors, especially agriculture-related items such as tractors and fertilisers, there are still some inputs for tractors which are in the 18 per cent slab or the subsidy for fertilisers is lowering the output price and leading to inversion.
An IDS under the GST regime occurs when the tax rate on inputs exceeds the tax rate on the final output. This discrepancy leads to an accumulation of unutilised Input Tax Credit (ITC), as businesses pay more tax on their inputs than they collect on their output.
Notably, the long-pending correction of inverted duty structure has been carried out for textiles and fertiliser sectors. GST cuts were announced for the manmade textile sector, with manmade fibre seeing the tax rate being cut to 5 per cent from 18 per cent and manmade yarn to 5 per cent from 12 per cent. But inversion in tax structure continues for a few items such as the inputs required for polyester fibre and textile machinery.
A textile industry executive said that IDS has been addressed in about 80 per cent of the textile value chain but minor inversions exist due to the wide difference between input items placed under the 18 per cent slab and final products under the 5 per cent slab. “The inversion has not been eliminated in its entirety. Two major inversion areas are raw material for polyester fibre and textile machinery. The machinery user industry comes at 18 per cent and the product at 5 per cent. This was an issue earlier too but now the wide difference between the two rates is significant and that is causing concern for working capital. We are hoping that the refund mechanism is smooth so that there is no capital blockage,” the industry executive quoted above said.
For the fertiliser sector, GST has been reduced on inputs such as sulphuric acid, nitric acid, and ammonia to 5 per cent from 18 per cent. However, industry sources said there may still be some inversion on account of packaging costs. Also, since the government subsidies the fertilisers, the final output price may turn out to be lower than the price of inputs and hence, would result in inverted duty structure.
While officials involved in the GST rate rationalisation exercise admitted to the transitional issues and some cases of inversion especially arising because of packaging costs at 18 per cent slab, they said work has been done towards correcting the inverted duty structure in majority of the cases that is expected to even result in savings on account of lower outgo for refunds. For instance, the GST authorities are anticipating savings for the fertiliser sector to the tune of Rs 5,000 crore as the annual refund outgo will reduce to that extent after correction of IDS due to the cut in GST rates for its inputs.
The GST Council has also given its nod for amendments in Section 54(6) of the Central GST (CGST) Act, that will pave the way for risk-based provisional sanction of refunds arising from IDS. “The Council recommended amending section 54(6) of the CGST Act, 2017, to provide for sanction of 90 per cent of refund claimed on provisional basis, in cases arising out of inverted duty structure, on similar lines as is presently available for refund in respect of zero-rated supply,” the statement issued after last week’s 56th meeting said.
Pending these amendments, instructions will be issued by the Central Board of Indirect Taxes and Customs (CBIC) to direct central tax field formations to grant provisional refund equivalent to 90 per cent of amount claimed as refund, arising out of IDS on the basis of identification and evaluation of risk by the system, as in the case of provisional refunds on account of zero-rated supplies. This is likely to be operationalised from November 1 and the timeline may get advanced to October, an official said.
An industry executive who did not wish to be named said that if there is a risk of substantial amounts getting stuck within the refund process, it gives way to tendencies of evasion. “The widening gap should be lowered so that working capital is not stuck,” the executive said.
Pradeep K Aggarwal, Chairman (Northern Region), Engineering Exports Promotion Council (EEPC) India, said that industry associations in Ludhiana along with the council have been pushing for a reduction in GST rates for bicycles and that an almost 7 per cent reduction from 12 per cent “is a very substantial reduction”.
“But the issue that still remains is that the GST rate for raw materials is at 18 per cent, which poses a cash flow problem because companies will have to apply for a refund, which will be a huge amount. Steel being a basic product, GST at 18 per cent is very high. So bringing that down, the biggest advantage will be that more and more people will come into the tax as one of the reasons why the industry sought lower GST was also that at 12 per cent evasion was high. Lower rate will help compliance,” Aggarwal said.
The edible oil industry, which had raised demand for correction of the IDS before the GST Council meeting, has said that the issue has not been resolved for their sector. Solvent Extractors’ Association of India (SEA) President, Sanjeev Asthana, told The Indian Express that the inverted duty structure had caused an accumulation of input tax credit of over Rs 300 crore since 2022, which is seriously hurting the domestic industry. “This issue has not been addressed in the recent GST reforms,” Asthana said.
The issue of inverted duty structure was discussed in earlier GST Council meetings also. According to the minutes of the 47th GST Council meeting held in June 2022, the council had disallowed refunds “in cases where inversion is not envisaged like edible oils, coal and other items”. The minutes showed that “the inverted duty structure corrections were suggested by increasing or calibrating the rate of tax in other cases”.
