No input tax credit pile-up, inverted duty structures in new GST regime: How will you benefit?

The plan to reduce the accumulation of input tax credit by correcting inverted duty structures can not only benefit manufacturers or businesses but also the end consumers. Let's understand in this article:

Inverted duty structures occur when the tax on inputs (raw materials or input services) is higher than the tax rate on output goods or services. Because of this mismatch, businesses or manufacturers end up paying more tax on their purchases (inputs) than the tax they collect on sales. This leads to an accumulation of input tax credits.

The ITC accumulation reduces the cash flow and increases costs for businesses. This is because manufacturers cannot fully utilise the ITC if the input taxes are greater than the output tax.

Moreover, in the current system, businesses cannot readily claim the unused ITC or utilise it against output tax liabilities, which means their working capital is blocked.

The Government may remove the inverted duty structures by lowering the input tax rates or raising the output tax rates.

How will consumers benefit?

Correcting the inverted duty structures will likely help in lowering prices, improving quality and reducing the hidden tax costs to consumers.

It can have a positive impact on essential goods, especially sectors like textiles and fertilizers may benefit.

What is Input Tax Credit (ITC)?

Input tax credit is a mechanism in the current GST law that helps avoid cascading of taxes. In simple words, you can say that ITC helps in avoiding a tax on tax.

In a typical business, you pay tax while purchasing an item and on the profit made after selling it. The input tax credit mechanism helps in claiming tax paid at the time of purchase as a deduction while paying tax after the sale.

The input tax credit can be claimed by any registered person on the inward supply of goods or services or both, which is used or intended to be used in the course of a business.