Definition
Inverted Duty Structure
An inverted duty structure under GST arises when the tax rate on inputs is higher than the rate on the finished output, leading to accumulated input tax credit.
An inverted duty structure occurs when a manufacturer pays GST on raw materials at a higher rate than the GST charged on the final product. This leaves unused input tax credit piling up, straining the business's cash flow because the credit cannot be fully set off against a smaller output liability.
GST law allows a refund of the accumulated credit in such cases, subject to a prescribed formula and conditions, though the process can be contentious. The GST Council also periodically corrects inversions by realigning rates on inputs and outputs.
Related terms
- Input Tax Credit (ITC)Input Tax Credit lets a GST-registered business offset the tax it has already paid on purchases against the GST it collects on sales, so tax is levied only on value added.
- GST SlabsGST slabs are the multiple tax-rate categories under GST into which goods and services are classified, ranging from nil-rated essentials to higher rates on luxury and sin goods.
- GST CouncilThe GST Council is the constitutional body that decides the rates, exemptions and rules of GST through consensus between the Centre and the states.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.