Meaning of Inverted duty structure

Term Inverted duty structure under GST


The details about Inverted duty structure are explained here.

Inverted duty structure

An important drawback of commercial policy or the import tariff policy is the problem of inverted duty structure prevailing in different industries.

Inverted duty structure is a situation where import duty on finished goods is low compared to the import duty on raw materials that are used in the production of such finished goods. For example, suppose the tariff (import tax) on the import of tyres is 10% and the tariff on the imports of natural rubber which is used in the production of tyres is 20%; this is a case of inverted duty structure.

When the import duty on raw materials is high, it will be more difficult to produce the concerned good domestically at a competitive price. Several industries depend on imported raw materials and components.

 High tax on the raw materials compels them to raise price. On the other hand, foreign finished goods will be coming at a reduced price because of low tax advantage. In conclusion, manufactured goods by the domestic industry become uncompetitive against imported finished goods.

The disadvantage of the inverted duty structure increases with the increased use of imported raw materials. An inverted duty structure discourages domestic value addition.

For India, there are several examples of inverted duty structure especially after the signing of the India-ASEAN FTA.


Inverted Duty Structure in GST- Uncertainty looms over refund:

Inverted duty structure means situation where the tax on input is more than tax on output. At present, Central Laws do not provide for any refund of credit accumulation on account of differential tax rates, particularly when the rate of tax on inputs is more than rate of tax on output.

Glance at provisions of Section 38(2) of GST Act, 2016

Section 38 refund of tax

Subject to the provisions of sub-section (8), a taxable person may claim refund of any unutilized input tax credit at the end of any tax period:

Provided that no refund of unutilized input tax credit shall be allowed in cases other than exports or in cases where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on outputs:

Provided further that no refund of unutilized input tax credit shall be allowed in cases where the goods exported out of India are subjected to export duty.

In the case of refund on account of inverted duty structure, refund of input tax credit shall be granted as per the following formula -

Maximum Refund Amount = {(Turnover of inverted rated supply of goods) x  Net  ITC  ÷  Adjusted Total Turnover} - tax payable on such inverted rated supply of   goods

Explanation.- For the purposes of this sub rule, the expressions “Net ITC” and “Adjusted Total turnover” shall have the same meanings as assigned to them in the GST rules.

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