“The inverted duty structure under GST
needs to be corrected, it is resulting in huge refunds outgo. Mobile phones, fabric and others could see rate rectification,” said a government official.
Such a structure arises when the GST
rate on raw materials is higher than those on finished products, resulting in higher input tax credit (ITC) outgo. A registered taxpayer may claim refund of unclaimed ITC on account of a higher tax on input and lower tax on output. For example, the GST rate on mobile phones is 12 per cent; those on phone parts and batteries is 18 per cent. Last year, a manufacturer claimed a refund of close to Rs 4,100 crore.
So, one proposal before the Council is to hike the rate on mobile phones to 18 per cent. Similarly, the GST on fabric could be raised from the current one of 5 per cent, to 12 per cent — different types of yarn are taxed at the later rate. Initially, the Council had not allowed fabric makers to claim ITC refund but later relented and allowed these in its July 2018 meeting.
“ITC refunds should not have been allowed on fabric in the first place. It was a political call at that time. It should be addressed now,” said another official.
As for shoes, those priced under Rs 1,000, are taxed at 5 per cent, while inputs are in 12 (leather, non-woven fabric) and 18 per cent slabs.
The rate on chemical fertiliser is likely to go from 5 per cent now to 12 per cent.
Manufactured goods in the 5 and 12 per cent slabs also have an inverted duty structure. An officers' panel on revenue augmentation told the Council in December that this results in litigation and distortion, especially with input services and capital goods. The panel had listed 24 items — including mobile phones, footwear, fabrics, LED lights, medical equipment, utensils, agricultural machinery, pharmaceuticals and renewables' components — in this regard, as resulting in refunds of close to Rs 20,000 crore in a year.
Pratik Jain, partner at consultants PwC India, said tracking of end-use is often a challenge. “One quick way to address this is to provide complete and timely refund of input credit accumulated, including that on services which is currently not covered,” he suggests.