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Oct 07, 2025
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Explainer: How inverted duties mess up GST rate cuts
By Bipin Sapra and Swati Saraf
The current ITC refund mechanism does not take into account the GST paid on input services and capital goods. Aligning rates, enabling refunds, and gradually moving toward a unified rate will give businesses certainty and foster long-term investment, explain Bipin Sapra & Swati Saraf
From a four-tier to a two-tier rate structure
The rollout of Goods and Services Tax (GST) rate rationalisation on nearly 400 items marks a decisive step in India’s tax reform journey. The GST Council has demonstrated responsiveness to stakeholder concerns, balancing revenue mobilisation with the objective of easing inflationary pressures on households. The newly rationalised GST structure reflects this balance. With the current reforms, India has moved from a four-tier to a two-tier system, reducing complexity and making taxation more predictable. Most essential goods and certain services now fall under the 5% slab, ensuring affordability, while the majority of services remain under the 18% slab, sustaining fiscal revenues from a fast-growing sector.
Rationalisation enhances affordability, global competitiveness, and predictability representing one of the most significant overhauls since GST’s inception. The dual-rate system is already visible in sectors like food, FMCG, and consumer goods, where the benefits of lower rates are being passed on to consumers.
Why do inverted duties matter?
The GST rate reduction also brings a challenge: the inverted duty structure (IDS), where rates on input supplies exceed the rates on output supplies. This creates significant accumulation of Input Tax Credit (ITC). While refunds exist, they are currently limited to ITC on inputs, excluding accumulation from input services and capital goods, leaving businesses with stranded credits and liquidity stress.
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