Managing ITC Amid Structural Tax Rate Differences

**Understanding Inverted Duty Structure: A Missed Opportunity in the Agarbatti Sector** Recently, while reviewing the GST compliance of a new client in the agarbatti (incense sticks) manufacturing industry, we identified a significant issue: an unclaimed Input Tax Credit (ITC) of ₹12,00,000 due to an unaddressed **inverted duty structure**. In this case, the GST on inputs (e.g., bamboo sticks, perfumes, packaging materials) was higher than the GST on the final product. Under GST law, businesses facing such a scenario are generally eligible to claim a **refund of the accumulated ITC**. Unfortunately, the client's previous advisor did not bring this to their attention, and the refund window lapsed. This case underscores a broader concern: in sectors where **input-output tax rate mismatches** exist, timely identification and action are essential. The agarbatti industry is one such sector where this issue is particularly relevant due to concessional GST rates on the final product. Professionals working with clients in manufacturing and traditional sectors should remain alert to duty structure anomalies to avoid unintended financial losses. # GSTupdate

🔎 Inverted Duty Structure Refund in GST – A Practical Guide for Businesses One of the common challenges many businesses face is the Inverted Duty Structure (IDS) under GST. This happens when the tax rate on inputs is higher than the tax rate on outward supply. 👉 Example: • Raw material purchased at 18% GST • Finished goods sold at 5% GST➡️ Result: Excess ITC accumulation that cannot be fully utilized. To ease this burden, GST law allows businesses to claim a refund of the unutilized ITC.   📌 Process to Claim IDS Refund: 1. File Refund Application in Form GST RFD-01 on the GST portal. 2. Select the category “Refund of unutilized ITC on account of inverted duty structure”. 3. Upload the required documents and statements. 4. Submit ARN (Acknowledgement Reference Number) after filing. 5. Refund will be processed after verification by the department.   📑 Key Documents Required: • GST RFD-01 form (online). • GSTR-1 & GSTR-3B for the relevant period. • Statement 1A (auto-populated on portal, with invoice-wise details). • Purchase & Sales invoices for the claim period. • CA/Cost Accountant certificate (if refund > ₹2 lakhs). • Declaration that ITC has not been claimed as refund earlier. • Any other supporting documents required by GST officer.   ⚠️ Important Points to Remember: • Refund not allowed if the goods/services are notified by the Government. • No refund of ITC on input services or capital goods. • Apply refund within 2 years from the end of the relevant financial year.   ✅ Bottom line: If your business is paying higher GST on inputs (say 18%) and selling at lower GST (say 5%), don’t let your working capital get blocked. File an IDS refund and recover your unutilized ITC. 👉 Have you checked whether your business is eligible for an IDS refund? #GST #Refund #InvertedDutyStructure #Taxation #Compliance #BusinessGrowth  

Judgement by Honorable Delhi High Court dated 05/12/23 (INDIAN OIL CORPORATION LIMITED Versus COMMISSIONER OF CENTRAL GOODS AND SERVICES TAX & ORS.) Manufacturing businesses are eligible for refund of ITC on Inputs under inverted duty structure because even though the input supply and output supply is the same, the rate chargeable on input and output are different. It means even if the GST rate on principal input and principal output are same but if ITC accumulated due to other inputs which are used during the manufacturing process then such accumulated ITC is eligible for refund under inverted duty structure

GST cut on cement from 28% -> 18% won’t automatically lower prices. Under the earlier regime, input taxes were fully offset through input tax credit (ITC). Under ITC, businesses pay tax to their suppliers using tax payment received from customers. Example: If CP = Rs.100 and input tax = 30, and SP = 110 with output tax = 30.8 (28%*110), the seller used the Rs. 30.8 collected to settle the 30 ITC -> NO cash impact. Post cut, output tax on SP drops to 19.8 (18%*110). ITC still remains Rs.30. The seller now needs to fund the Rs. 10.2 gap from his own cash. This hits Net Working Capital and margins, leaving no room for price cuts. This is classic low passthrough elasticity: cost reductions at one stage don’t translate into consumer price reductions when liquidity pressure rises elsewhere. This issue applies mainly to commercial projects, where ITC is allowed. For residential projects, tax can be passed to buyers, so cement can genuinely get cheaper. Bottom line: Don’t rely on tax headlines; rely on value-chain economics.

While everyone is talking about GST rate cuts There are two silent changes which no one knows about. Now, 90% provisional refunds will be provided on inverted duty structures👇 [1] What’s an “inverted duty” setup? When GST on your purchase is higher than GST on your sales, Input Tax Credit (ITC) piles up. More working capital money gets stuck in ITC. Let’s Understand this with an example: [2] Example 🔸 Li-ion battery: ₹10,000 @ 18% → ITC ₹1,800 🔸 Solar module: ₹12,000 @ 5% → ITC ₹600 🔸 Other parts: ₹8,000 @ 18% → ITC ₹1,440 🔸 Total ITC (₹1,800 + ₹600 + ₹1,440): ₹3,840 🔸 Finished lamp (output): ₹40,000 @ 5% → GST payable ₹2,000 🔸 Unutilised ITC: ₹3,840 − ₹2,000 = ₹1,840 [3] How the taxpayer gets the refunds 🔸 Section 54(3) allows refund of unutilised ITC (with exclusions) 🔸 Rule 89(5) gives the computation formula [4] Earlier, what was the challenge? 🔸Process-heavy claims,  🔸Multiple clarifications,  🔸No tight timelines  Cash cycles felt the strain even when business was sound. [5] What new from Nov 2025 🔸 90% of eligible refund will be released provisionally, based on risk. 🔸 Balance 10% after verification 🔸 In exceptional cases, officers may record reasons for a deeper check [6] Let’s go back to our example  Unutilised ITC (illustrative) ≈ ₹1,840 → 90% provisional ≈ ₹1,656 hits faster; \~10% after checks. Net effect: smoother raw-material planning, quicker vendor payments, better cash rhythm. [7] One more change → Registration No GST Number → no invoices → no ITC flow. [8] Registration: what it was To get the GST No. → Earlier Manual checks, site visits in some cases and variable timelines.  For many new businesses, the first invoice got pushed out. [9] Registration: what’s new 🔸 “Simplified Registration” for low-risk applicants 🔸 Automated approval within 3 working days 🔸 Opt-in/opt-out flexibility 🔸 Eligible if B2B output tax ≤ ₹2.5 lakh/month 🔸96% of new applicants covered Roll-out: Nov 1, 2025. Like the content? Follow me (Sujit Bangar) for more on personal taxation.