Industry bodies have raised concerns about the impact of inverted duty structure in the GST framework that is creating challenges especially for small and medium enterprises. Stating that the Inverted Duty Structure (IDS) has led to unutilized input tax credits, Empower India on Tuesday added that this “choking working capital and undermining the competitiveness” of MSME businesses.
With the rationalisation of GST rates that came into effect from September 22, the think tank group that focuses on governance and regulatory issues noted the impact of the inverted duty structure is visible across sectors such as pharmaceuticals, FMCG, insurance, ecommerce, edible oils, and packaged foods, where input and service tax rates are often higher than output rates.
“While GST was designed to ensure tax neutrality and eliminate the cascading effect of taxes, the current framework has inadvertently created a situation where input tax rates exceed output tax rates in several sectors—leaving businesses unable to recover legitimate tax credits on input services and capital goods,” Empower India said in a statement. It noted that this has led to mounting financial pressures, increased cost of doing business, and a credit chain riddled with inefficiencies that disproportionately impact smaller players with limited access to capital.
The exclusion of input services and capital goods from the refund mechanism has compounded the challenge, creating a structural disadvantage that threatens the viability of businesses across manufacturing, exports, and services sectors, it added.
“A predictable and efficient input tax credit framework is central to the success of GST.While recent revisions to the refund formula are a step forward, the continued exclusion of input services and capital goods constrains liquidity and creates cost pressures across sectors. Addressing these gaps will be important to ensure tax neutrality and support industry competitiveness,” said K. Giri, Director General, Empower India.
“By expanding the scope of the refund mechanism to cover input services and capital goods, amending Section 54(3) of the CGST Act to enable broader refunds, revising the definition of Net ITC, simplifying procedures, and issuing clear guidance shall address ambiguities and ensure consistent implementation,” he added.
Published on March 31, 2026
