GST Reforms: Challenges in Input-Output Tax Rates

The Goods and Services Tax (GST) regime in India has introduced a two-slab rate structure of 5% and 18%, aiming to simplify tax compliance and enhance ease of doing business. Despite these changes, significant concerns persist regarding the inverted duty structure (IDS), where the tax on inputs is higher than that on final products. This situation leads to accumulation of unutilized Input Tax Credit (ITC) and creates cash flow issues for many industries.

For example, steel continues to be taxed at 18%, while bicycles and e-bicycles are taxed at a mere 5%. This discrepancy creates a situation where manufacturers face higher costs for raw materials, thus affecting their working capital. Although the government has taken steps to address IDS in various sectors, including textiles and fertilizers, some areas still experience significant gaps between input and output rates.

In the textile sector, about 80% of the value chain has seen corrections, but issues remain with certain raw materials, particularly for polyester fibre and textile machinery. Industry executives have expressed concerns that these remaining gaps hinder cash flow and working capital management. The expectation is for a smooth refund mechanism to alleviate some of these pressures.

In the fertilizer sector, while the GST on inputs like sulphuric acid has been reduced, concerns linger regarding packaging costs that still attract higher taxes. Government subsidies on fertilizers may also result in lower output prices than input costs, perpetuating the IDS problem. Officials have acknowledged these transitional issues but are optimistic about ongoing corrections that could lead to significant savings.

The GST Council recently approved amendments that will facilitate provisional sanctioning of refunds related to IDS, aiming to ease financial stress on businesses. This move is expected to operationalize soon, providing much-needed liquidity to affected sectors. However, industry leaders caution that substantial amounts stuck in the refund process could incentivize tax evasion, calling for further adjustments to minimize the gaps.

For sectors like edible oil, the issue of IDS remains unresolved, with substantial input tax credits accumulating since 2022. As businesses continue to advocate for reforms, the widening gap between input and output tax rates underscores the urgency for continued dialogue and action within the GST framework. Ultimately, addressing these challenges will be crucial for ensuring compliance and fostering a thriving economic environment in India.