Inverted Tax Structure & Unutilized ITC on Services

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Companies operating under an inverted tax structure, where GST on inputs is higher than on outputs, are struggling with unutilised Input Tax Credit (ITC) on services. Current GST refund rules under Section 54(3) of the CGST Act and Rule 89(5) only allow refunds for input goods, leaving ITC on services stuck in the Electronic Credit Ledger. This issue is prevalent in sectors like textiles, footwear, and renewable energy, leading to working capital blockage. Businesses are exploring strategies such as vendor restructuring, pricing adjustments, and lobbying for legislative changes to address this challenge.

Challa Praveen Kumar

Challa Praveen Kumar (Querist)

31 October 2025 Hi Everyone,

We are facing an issue related to Inverted Tax Structure under GST, and I wanted to get your views and experiences on this:

1. In case of Inverted Tax Structure, we are losing ITC on the service portion since the refund formula allows refund only on input goods, not on input services. This unutilized ITC just sits in the Electronic Credit Ledger (ECL) & accumulates and practically doesn’t benefit the organization in any way.

2. I wanted to understand which industries are facing this issue and how they are strategically handling it

3. If anyone has faced and overcome this issue earlier, it would be great to connect and discuss the strategic moves adopted — it might help our organization handle this situation more effectively.

Dhirajlal Rambhia

Dhirajlal Rambhia (Expert)

31 October 2025 These sectors typically face higher GST rates on inputs (especially goods) than on outputs, leading to ITC accumulation:
- Textiles & Apparel: Inputs like synthetic yarn attract 18% GST, while output fabrics may be taxed at 5%.
- Footwear: Raw materials taxed at 18%, while footwear under ₹1000 is taxed at 5%.
- Fertilizers: Inputs like phosphoric acid and ammonia taxed at 12–18%, while finished fertilizers are taxed at 5%.
- Renewable Energy (Solar/Wind): Equipment taxed at 18%, but output services (electricity) are exempt or nil-rated.
- Pharmaceuticals: Packaging and chemicals taxed higher than the final product in some cases.
- Railway Components & Auto Parts: Inputs taxed at 18%, while certain outputs are taxed lower.

Dhirajlal Rambhia

Dhirajlal Rambhia (Expert)

31 October 2025 To mitigate the impact of blocked ITC on input services, companies are adopting several tactics:
- Vendor Restructuring: Shifting service procurement to vendors who supply bundled goods + services, allowing more ITC to be claimed under goods.
- Pricing Adjustments: Factoring in ITC loss into product pricing to maintain margins.
- Internal Consumption: Redirecting unused ITC towards internal taxable services (e.g., renting out premises, consulting) to utilize credits.
- Cross-utilization: Using ITC against other taxable outputs (if any) within the same GST registration.
- Lobbying & Representation: Industry bodies like FICCI and CII have been pushing for legislative changes to allow refund of ITC on input services.
- State-level Incentives: Some states offer subsidies or refunds to offset the working capital blockage caused by ITC accumulation.

Dhirajlal Rambhia

Dhirajlal Rambhia (Expert)

31 October 2025 - Section 54(3) of CGST Act allows refund only on input goods, not services or capital goods.
- Rule 89(5) defines the refund formula, which excludes input services from the “Net ITC” calculation.
- Accumulated ITC remains in the Electronic Credit Ledger but cannot be monetized unless used against taxable output.

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