Inverted Duty Structure Under GST Complete Guide for Manufacturers

Inverted Duty Structure (IDS) in GST is a situation where the GST rate on your inputs raw materials and components is higher than the GST rate on your finished product.

Normal tax structure: low GST on inputs, high GST on output. Inverted duty structure: HIGH GST on inputs, LOW GST on output. The result? You pay more tax going in than you collect going out. That difference gets stuck in your Electronic Credit Ledger as blocked Input Tax Credit and it compounds every month.

When input GST rate exceeds output GST rate, ITC accumulates in your Electronic Credit Ledger because you cannot fully offset input tax against output tax liability. Every month, the blocked amount grows.

Pre-GST, this problem existed with import duties raw materials had higher import duty than finished goods. Post-GST, the same problem exists but now across domestic transactions. GST Council has tried to fix IDS in several rate rationalisations, and the extent of inversion now varies by industry, product and HSN classification.

The government’s solution: Section 54(3) of CGST Act allows registered taxpayers to claim refund of accumulated ITC due to inverted duty structure. The refund is calculated using Rule 89(5) formula and filed through Form RFD-01 on the GST portal. For broader claim support, explore our GST Refund Process page.

Inverted duty structure can affect industries where the applicable GST rate on eligible inputs is higher than the rate on taxable output supplies. After the September 2025 rate rationalisation, the actual impact must be checked HSN-wise.

Certain textile products may still face IDS depending on HSN and the applicable input/output rate structure; the September 2025 reforms corrected major inversion in the man-made fibre/yarn chain.

IDS can result in significant accumulation of unutilised ITC where eligible input tax consistently exceeds output tax liability.

Key terms:

• Net ITC: Eligible ITC availed on inputs during the relevant period. Input services and capital goods are not included in Net ITC for the Rule 89(5) IDS refund formula.
• Turnover of Inverted Rated Supply: Turnover of goods where input GST rate is higher than output GST rate.
• Adjusted Total Turnover: Total state turnover minus exempt supplies and certain zero-rated supplies.
• Tax Payable on Inverted Rated Supply: GST payable on the inverted rated goods sold.

The limitation period must be calculated using the applicable "relevant date" under Section 54, not a blanket financial-year-end date.

An IDS refund application is generally required within two years from the applicable relevant date under Section 54. For refund of unutilised ITC under Section 54(3), the relevant date is the due date for furnishing the Section 39 return for the period in which the refund claim arises.

Required documents depend on the refund category and facts of the claim. Missing or inconsistent records may lead to deficiency communication, queries or rejection.

• Form RFD-01 filed on GST portal under refund on account of inverted tax structure
• Statement 1 / applicable IDS statement details for the claim period
• GSTR-3B copies for all tax periods included in the claim
• GSTR-2B and ITC reconciliation supporting eligible credits claimed
• Purchase invoices all input goods invoices with correct HSN codes
• Sales invoices all output supply invoices
• Applicable declarations and supporting documents under Section 54 and Rule 89, as required for the refund category. A CA/CMA certificate is not required merely because an eligible IDS refund exceeds ₹2 lakh.
• Bank account details / portal requirements for refund credit

Risk-Based 90% Provisional Refund for IDS Claims

CBIC Instruction No. 06/2025-GST dated 3 October 2025 introduced an interim risk-based mechanism for provisional sanction of up to 90% of eligible IDS refund claims filed on or after 1 October 2025. The facility is not automatic and depends on system-based risk evaluation, applicable conditions and officer-level safeguards.

The Finance Act, 2026 framework provides for extending Section 54(6) to IDS refunds, with the statutory amendment taking effect from a date notified by the Government.

Provisional sanction depends on system-based risk identification, Rule 91 conditions, applicable exclusions and any case-specific reasons recorded by the proper officer.

Common refund issues include ineligible ITC, reconciliation differences, incorrect calculations and incomplete supporting records.

For the economy: IDS is a design flaw in GST rate structure. It blocks working capital, increases compliance burden, and hurts MSMEs that operate on tight margins. The government has acknowledged this which is why refund provisions exist under Section 54(3).

For manufacturers specifically: IDS can reduce available working capital where eligible ITC continues to accumulate. Section 54(3) provides a statutory refund route in eligible cases, subject to the applicable conditions, exclusions and limitation period.

GST Council has attempted IDS corrections in multiple rounds, with September 2025 reforms addressing several major inversions. For pharma, footwear, textile, EV, corrugated box and other manufacturers, the position now depends on the exact HSN-wise input/output rate structure. Where eligible ITC continues to accumulate, an IDS refund under Section 54(3) can provide a statutory route to release eligible unutilised credit.

This page has been reviewed with reference to:

• Section 54 of the Central Goods and Services Tax Act, 2017
• Rule 89 and Rule 91 of the Central Goods and Services Tax Rules, 2017
• CBIC Instruction No. 06/2025-GST dated 3 October 2025
• GST Council / PIB material on the September 2025 rate rationalisation
• Finance Act, 2026 provisions relating to Section 54(6), subject to notified commencement

GST rates, classifications and refund rules may change. Eligibility should be checked against the facts of the specific claim and the law in force at the time of filing.