GST Refunds Under Inverted Duty Structure

The inverted duty structure (IDS) under GST arises when inputs are taxed at higher rates than output supplies, leading to accumulation of unutilized input tax credit (ITC) and liquidity blockages. GST 1.0, with four tax slabs, intensified these anomalies, especially in sectors like textiles, footwear, pharmaceuticals, renewable energy, and EV manufacturing. GST 2.0, introduced after the 56th GST Council meeting in September 2025, rationalised rates into two slabs (5% and 18%), but IDS persists as inputs largely remain at 18% while many outputs fall to 5%. To ease working capital strain, the Council proposed provisional refunds of 90% and automatic refund mechanisms, though risks of fraud necessitate strong digital verification. Statutory provisions under Section 54 and Rule 89(5) govern refund eligibility, limited to input goods, with restrictions notified for certain sectors. Judicial rulings, including VKC Footsteps, Malabar Fuel Corporation, and Tirth Agro Technology, continue to shape the evolving refund landscape.

WHAT IS INVERTED DUTY STRUCTURE AND WHY IT OCCURS?

Inverted Duty Structure (IDS) means when the GST rate on inputs (input goods and/or raw materials used to manufacture final products) is higher than the tax rate on output supplies (finished goods) after manufacturing, processing or assembling goods. This situation results into the