Officials explore input tax credit fixes for smooth GST transition

Suggest allowing unused ITC for SGST payments, Customs duty offsets, or tradable scrips

In an inter-ministerial meeting chaired by Cabinet Secretary T V Somanathan ahead of the implementation of goods and services tax (GST) reforms on September 22, senior officials from various departments on Monday proposed allowing unutilised input tax credit (ITC) to be used for paying state GST (SGST), offsetting Customs duty, or converting it into tradable scrips, as possible solutions to address transition issues.

 

The meeting came at a time when many sectors have raised concerns over compensation cess, accumulated input tax credit, and an inverted duty structure.

 

Following the recent GST rate rationalisation exercise, many products, including fast-moving consumer goods (FMCG), food items, and pharmaceuticals, will attract 5 per cent GST, while certain inputs are taxed at 18 per cent, including services used. This is expected to create an inverted duty structure, leaving a significant portion of ITC unutilised, and thus affecting working capital and constraining operational flexibility for smaller manufacturers.

 

“Inverted duty structure was one of the key issues raised by ministries affected by it,” a government official said, requesting anonymity. The meeting was attended by secretaries and senior officials from revenue, textiles, agriculture, heavy industries, consumer affairs, commerce, chemicals and fertilisers, and steel, among others.           

 

An email query sent to the Finance Ministry remained unanswered until the time of going to press.

 

Although the government has allowed 90 per cent refund on inputs in cases of inverted duty structure, experts note that refunds are not admissible for GST paid on capital goods and input services. “That’s why it is imperative for the government to address this issue so that lower tax benefits could be passed on to consumers,” a tax expert said, requesting anonymity.

 

A second tax expert, also speaking on condition of anonymity, added that the suggestions made by ministries could face resistance from states over concerns regarding revenue loss. Legal hurdles also remain, as the law does not permit adjusting central GST (CGST) against SGST and vice versa.

 

“Unutilised ITC carries both CGST and SGST components, and existing GST circulars do not permit refunds of unutilised ITC arising solely due to a reduction in rates on the same item. Also, allowing ITC to be used for SGST would perhaps not be welcomed by states due to potential revenue implications,” he said.

 

“Customs duty cannot be offset with GST credits as it is levied under a separate legislation,” the expert added, noting that tradable scrips remain a feasible option, pending approval by the GST Council.

 

Tradable scrips are certificates issued by the government that can either be used to pay specified taxes or sold to other businesses, providing liquidity similar to export incentive vouchers.

 

“The tax authorities may not support the issue of such scrips to discharge GST liability due to the risk of misuse -- unless digitally generated and traded on the GSTN platform, which would require major system upgrades,” a former tax official said.

 

Abhishek Jain, indirect tax head & partner at KPMG, said the government could consider allowing refunds on capital goods and input services under the inverted duty structure to ease the problem of blocked credit. “However, such a move cannot be taken overnight as it carries the risk of misuse by fraudulent taxpayers. It would be a major reform that needs to be implemented with caution and strong safeguards,” he added.

 

Krishan Arora, partner with Grant Thornton Bharat, said there is an immediate need for policymakers to avoid inverted duty structures, particularly in sectors where GST rates have dropped to 5 per cent from 12 or 18 per cent, such as FMCG and pharmaceuticals.

 

“There ought to be adequate measures to ensure transitional relief through clear and transparent refund schemes, and ongoing efforts to ensure there are no working capital blockages. The government should also consider any further rate corrections for raw materials where such rates are still pegged at 18 per cent while final products are taxed at reduced rates of 5 per cent,” he added.