GST body could correct inverted duty on textile, fertiliser, footwear in March
The Goods and Services Tax (GST) council—the apex federal body on indirect taxation—is expected to consider removing inverted duty anomalies suffered by several sectors such as textile, fertiliser and footwear this month, two people aware of the development said.
This is an old issue that required urgent attention now as businesses involved in these sectors are unable to claim input-tax credit (ITC) because of higher levies on raw materials (or inputs) compared to the finished goods, they said requesting anonymity. Inverted duty structure is a situation in which inputs are taxed at a higher rate than finished goods.
The council could not correct it in the past, particularly during last year due to the pandemic, because it would have had an adverse impact on either GST revenue collections or consumer prices of the finished products, one person said. The GST council is chaired by the Union finance minister and has finance ministers of states as its members. The council’s decisions are often unanimous.
The council is expected to meet this month, but a date is yet to be finalised, the first person said.
“Inverted duty structure can be corrected either by reducing GST on inputs or by raising levies on finished products. Now, with rapid economic recovery and robust GST collections, this matter could be resolved. But, the final decision depends on the GST council,” the second person said.
The Indian economy has come out of recession in the third quarter of 2020 ending December 31, with a 0.4% growth after remaining in contraction mode for two consecutive quarters due to a 68-day hard lockdown since March 25 to check the spread of Covid-19. This also reflected in the GST collections. After remaining in contraction mode for six months in a row, GST revenue increased from September 2020 and crossed the ₹1 lakh crore mark in subsequent months.
Archit Gupta, the founder and chief executive officer (CEO) of the financial technology platform ClearTax, said the GST council had discussed the issue in the past, but without a conclusion. “The main reason is the loss of revenue resulting from any reduction of tax rates on the inputs,” he said.
“The inverted tax structure causes a ripple effect on the fund flow of a business. It blocks the working capital for businesses due to input tax credit accumulation,” he added.
According to Divakar Vijayasarathy, the founder and managing partner of consulting firm DVS Advisors LLP, said GST on input is higher than GST on output in some manufactured goods such as footwear, man-made yarn and LED lights. “The most critical impact is on the working capital of the businesses since GST paid at higher rates on inputs is blocked till the grant of refund,” he said. The refund process is cumbersome and tends to be vulnerable to litigations, he added.
Experts said such anomalies should also be corrected vis-à-vis service inputs. “The same situation arises when traders use e-commerce platforms to trade lower GST rate items or nil rate items and the platforms charge commission at 18% GST. Input-tax credit on commission pileups is of no use to the taxpayer, which ultimately affects business profitability and increased prices of items,” Kapil Rana, a chartered accountant and founder of HostBooks Ltd, a cloud-based accounting platform, said.
“The solution to inverted duty structure is imminent as has been mentioned by the FM in the Budget and the time has come to put the matter for the consideration of the council,” the first person said.
Delivering the budget speech on February 1, Union finance minister Nirmala Sitharaman said: “The GST council has painstakingly thrashed out thorny issues. As chairperson of the council, I want to assure the House that we shall take every possible measure to smoothen the GST further, and remove anomalies such as the inverted duty structure.”