What Happened
- Industry bodies and tax experts have urged the GST Council to extend refund eligibility for accumulated Input Tax Credit (ITC) to input services, not just input goods, under the inverted duty structure mechanism.
- Currently, Section 54(3) of the CGST Act, 2017 allows refund of unutilised ITC only when the accumulation arises from input goods — input services and capital goods are excluded.
- Experts argue that this exclusion creates a structural disadvantage for manufacturers, particularly in sectors like pharmaceuticals, textiles, footwear, fertilisers, and construction materials, where input services (logistics, professional fees, contract labour) constitute a significant share of costs.
- The absence of an input services refund mechanism means businesses have large amounts of working capital permanently locked in tax credit that cannot be offset or refunded.
- Industry representatives have written to Finance Minister Nirmala Sitharaman flagging this as a "working capital blockage" issue.
Static Topic Bridges
Inverted Duty Structure under GST
An Inverted Duty Structure (IDS) arises when the GST rate on inputs (goods/services used in production) is higher than the GST rate on the final output supply. This creates an anomaly where a business pays more tax on its inputs than it collects on its sales, resulting in the accumulation of unused Input Tax Credit (ITC) that cannot be utilised against output tax liability.
- Common sectors affected: footwear (inputs at 18%, output at 5%), fertilisers (inputs at 18-28%, output at 5%), solar panels (before rate revisions), textile intermediates, and construction.
- Refund formula: (Turnover of inverted supplies × Net ITC) / Adjusted Total Turnover − Tax paid on inverted supplies.
- The refund mechanism was introduced under Section 54(3)(ii) of CGST Act but currently excludes services used as inputs.
- The 50th GST Council meeting (July 2023) recommended revising some IDS rates to reduce the mismatch.
Connection to this news: Industry's demand to extend the refund to input services represents the next logical step in resolving the IDS problem — as modern manufacturing increasingly relies on services (logistics, IT, maintenance) as inputs, excluding them from the refund creates a new structural inequity.
GST Council: Structure and Decision-Making
The GST Council is a constitutional body established under Article 279A of the Constitution (inserted by the 101st Constitutional Amendment, 2016). It is chaired by the Union Finance Minister and includes state finance ministers. It makes recommendations on GST rates, exemptions, threshold limits, and administrative procedures. Its decisions require a three-fourths majority, with the Centre's vote having one-third weightage and all states together having two-thirds.
- GST went live on July 1, 2017, replacing a cascade of central and state indirect taxes.
- The GST Council has met over 55 times as of 2026.
- Key taxes subsumed under GST: Central Excise Duty, Service Tax, VAT, CST, Entry Tax, Octroi, Luxury Tax, Entertainment Tax.
- Taxes NOT subsumed: Petroleum products (CGST/SGST not yet applied), alcohol for human consumption, stamp duty, electricity duty.
Connection to this news: Any amendment to the inverted duty refund mechanism — including extending it to input services — requires a GST Council recommendation followed by legislative amendment to the CGST Act, making this a Council agenda item with broad state consensus requirement.
Input Tax Credit (ITC) Mechanism
ITC is the cornerstone of GST's design as a value-added tax. It allows registered businesses to offset the GST paid on inputs (goods, services, capital goods) against the GST collected on outputs, ensuring taxes are paid only on the value added at each stage of production. ITC prevents the "cascading effect" (tax on tax) that existed under the pre-GST regime.
- ITC eligibility conditions: valid invoice, supplier has filed return, goods/services received, GST payment deposited by supplier.
- ITC is blocked for certain items under Section 17(5): personal consumption items, food, health clubs, motor vehicles (with exceptions), works contract for immovable property.
- Provisional refund of 90% is available for IDS claims within 7 days of acknowledgment (CGST Instruction 6/2025).
- The two-year time limit for claiming refund is absolute; missing it results in permanent loss of entitlement.
Connection to this news: The exclusion of input services from IDS refund eligibility is technically grounded in Section 54(3)'s text, but critics argue it is inconsistent with the ITC mechanism's core principle — that all GST paid on business inputs should be creditable. Amending this provision would require careful revenue impact assessment by the fitment committee.
Key Facts & Data
- Section 54(3) CGST Act: allows ITC refund for IDS on input goods only; input services excluded
- GST rates relevant to IDS sectors: footwear inputs 18%, output 5%; fertiliser inputs 18-28%, output 5%
- Working capital blockage from IDS: estimated at thousands of crores annually across affected industries
- Provisional refund: 90% within 7 days of acknowledgment (CGST Instruction 6/2025, October 2025)
- Time limit for refund claims: 2 years from relevant date (absolute bar)
- GST Council established under Article 279A (101st Constitutional Amendment, 2016)
- GST launched July 1, 2017 — "One Nation, One Tax" framework
- The fitment committee (Revenue Secretary-led) evaluates rate change implications before Council meetings
- Input services in manufacturing: logistics, professional services, security, IT services, contract labour