Pharma, textiles, EVs seek GST fix for duty inversions

The September 2025 overhaul, which reduced the number of Goods and Services Tax (GST) slabs from four to two, simplified the indirect tax regime for consumers but widened inverted duty structures in several sectors, experts said.

An inverted duty structure arises when the GST rate on inputs is higher than that on finished products, resulting in ITC accumulation. While the rate cuts reduced the tax burden on several products and services, businesses in sectors facing such inversions continue to have large amounts of credit locked up.

"One of the unfinished agenda under GST is the accumulation of unutilised input tax credit, particularly in sectors facing inverted duty structures such as pharmaceuticals, textiles, footwear, fertilisers, renewable energy and electric vehicles," said Manoj Mishra, partner, Grant Thornton Bharat.

"While refunds are available in specified cases, the current framework does not fully address credit arising from input services and capital expenditure, which results in significant working capital blockage for prolonged periods," Mishra said.

The GST Council is expected to take up several process reforms at its upcoming meeting, including issues related to ITC.

The government has previously sought to address accumulated ITC through rate rationalisation and the introduction of risk-based provisional refunds for inverted duty structure cases. However, faster refunds only address the timing issue, while the underlying accumulation remains in sectors where the rate inversion is structural, Mishra said.

"In some businesses, the quantum of such unutilised credit can be substantial and remain locked for years," he added.

In several industries, ITC accumulation is primarily attributable to input services and capital goods that continue to attract GST at 18%, while outward supplies face a 5% tax.

This mismatch leaves significant amounts of ITC locked in electronic credit ledgers, increasing working capital requirements and gradually becoming an embedded cost in the value chain. This can adversely affect domestic manufacturing competitiveness and future investment, said Bipin Sapra, partner and indirect tax policy leader, EY India.

ITC accumulation is also a significant challenge for businesses undertaking large capital investments, experts said.

"During the set-up and expansion phase, companies accumulate substantial GST credits on plant, machinery and related services. These credits often remain locked for long periods as the current refund framework under inverted duty structures does not adequately address credits arising from capital expenditure. The result is significant working capital being trapped in the tax system," said Nitin Vijaivergia, partner, Price Waterhouse & Co LLP.

Mishra said the GST Council should consider a two-pronged approach: correcting persistent inverted duty structures at source and reviewing the refund mechanism for genuine accumulated credit, including credit attributable to input services.

"Allowing a refund of accumulated credits arising from rate inversion and attributable to input services and capital goods would improve liquidity, reduce tax cascading and support domestic manufacturing growth," Sapra said.

He also suggested extending relief to situations where credits remain unutilised because of business closures, lack of commensurate outward supplies, significant upfront investments, timing mismatches or tax payments on advances, all of which can result in long-term accumulation without a practical avenue for utilisation.