How to determine whether an Inverted Duty Structure (IDS) applies to any Goods, Product or Items under GST Laws of India?

[YAGAY andSUN]

To determine whether an Inverted Duty Structure (IDS) applies to any goods, product, or item under GST in India, you need to compare the GST rates on inputs (raw materials, intermediate goods, or services) and outputs (finished goods or final product). An IDS occurs when the input tax rate (on inputs) is higher than the output tax rate (on the finished goods or products).

Steps to Determine if IDS Applies to a Product or Item:

1. Identify the GST Rate on Inputs:
   • Inputs are the raw materials, intermediate goods, and services that are used in the production of finished goods.
   • Check the GST rate on each input used in the production process of the product or item.
   • For example, if you are manufacturing a product using raw materials like textile fabric, check the GST rate applicable to the textile fabric (input).
2. Identify the GST Rate on the Output (Finished Product):
   • Outputs refer to the final product that is sold to customers.
   • Check the GST rate applied to the finished goods or product. For example, if you're selling garments, identify the GST rate applicable to the garment (finished product).
3. Compare the GST Rates:
   • Inverted Duty Structure occurs when the input tax rate (on raw materials or services) is higher than the output tax rate (on the finished product).
   • Example 1:
     • If textile fabric attracts a 12% GST (input tax), but the finished garments attract only an 5% GST (output tax), this creates an Inverted Duty Structure.
   • Example 2:
     • If solar panels (input) attract 18% GST, but the electricity generated by solar energy (output) is zero-rated under GST, there is an inverted duty structure.
4. Check for Special Provisions or Exemptions:
   • Some industries may be specifically subject to an inverted duty structure due to special provisions or exemptions under GST.
   • For example, the textile and footwear industries often face inverted duty structures.
   • Also, exports are considered a zero-rated supply under GST, so if your product is intended for export, the output tax would be zero, and the input tax rate may be higher, leading to an IDS.
5. Identify Unutilized Input Tax Credit (ITC):
   • If businesses accumulate unutilized ITC (where the input tax paid on raw materials is greater than the output tax collected on the final goods), an IDS is present.
   • The unutilized ITC can be claimed as a refund under the GST laws for situations where IDS occurs.
6. Sector-Specific Examples of IDS:
   • Textile Sector: The raw material (like yarn) in the textile industry may have a higher GST rate than the finished product (garments), leading to an inverted duty structure.
   • Footwear Industry: Similar to textiles, the tax on raw materials like soles or leather might be higher than the tax on the finished footwear, resulting in IDS.
   • Renewable Energy Sector: For example, the input tax on solar panels could be 18%, but the output (solar energy) is zero-rated, creating an inverted duty structure.
   • Agricultural Products: If fertilizers or machinery used in agriculture have a higher tax rate than the output product (like crops or agricultural produce), IDS might apply.

How to Check GST Rates for Specific Goods?

To check the GST rates for any good or product, you can refer to the following:

1. GST Rate Schedule: The GST Rate Schedule (published by the Government of India) specifies the tax rates for various goods and services.
   • You can find the GST rate schedule on the official website of the Central Board of Indirect Taxes and Customs (CBIC) or the GST portal.
2. HSN Code Lookup: If you are unsure of the tax rate, you can look up the HSN (Harmonized System of Nomenclature) code for the specific goods to find the applicable GST rate.
3. GST Rate Finder Tool: The GST portal provides a GST Rate Finder tool that helps you find the applicable tax rates for specific goods or services based on their HSN or SAC codes.
4. Consult a GST Practitioner: If you're uncertain or need clarification, it's always a good idea to consult a GST practitioner or a tax professional who can provide guidance on whether a product is subject to an inverted duty structure and how to claim any applicable refunds.

Conclusion:

To determine if an Inverted Duty Structure (IDS) applies to any product or item, you need to:

1. Compare the GST rates on the inputs and outputs.
2. If the input tax rate is higher than the output tax rate, IDS exists.
3. If IDS exists, businesses may be eligible for a refund of unutilized ITC under Section 54 of the CGST Act.

By carefully comparing the input and output GST rates and checking for any special exemptions or provisions, you can identify whether an IDS situation exists for any particular good or service.