Inverted Duty Structure Posing Challenging for MSME Sector: Empower India

Why It Matters

The liquidity squeeze threatens MSME viability, risking slower growth in sectors that drive India’s export and employment agenda. Reforming GST refunds could unlock capital and improve competitiveness across the economy.

Key Takeaways

• Inverted duty structure leaves input tax > output tax.
• MSMEs lose usable ITC, hurting cash flow.
• Refund exclusions for services and capital goods exacerbate liquidity.
• Pharma, FMCG, e‑commerce sectors face steep cost pressures.
• Empower India calls for GST law amendments expanding refunds.

Pulse Analysis

The GST was introduced to simplify India’s tax landscape and eliminate cascading taxes, yet the emergence of an inverted duty structure has turned a neutral system into a cost sink for many businesses. When input tax rates surpass output rates, firms cannot fully claim input tax credits, leaving a pool of stranded credits on their balance sheets. This structural anomaly is most pronounced in high‑value sectors such as pharmaceuticals, fast‑moving consumer goods, and e‑commerce, where the tax on raw materials and services outpaces the tax on final sales.

For micro, small and medium enterprises, the impact is acute. Unused credits tie up working capital that could otherwise fund inventory, expansion, or payroll, forcing firms to rely on expensive short‑term financing. The ripple effect extends to the broader credit chain: suppliers face delayed payments, distributors encounter higher procurement costs, and consumers ultimately bear inflated prices. Moreover, the current GST refund mechanism excludes input services and capital goods, compounding liquidity challenges and eroding the competitive edge of smaller players who lack deep cash reserves.

Policy makers face a clear mandate: amend Section 54(3) of the CGST Act to broaden refund eligibility, redefine net ITC, and streamline filing procedures. Such reforms would restore the intended tax neutrality, improve cash flow for MSMEs, and reinforce India’s manufacturing and export ambitions. By aligning input and output tax rates and expanding refunds, the government can mitigate the credit crunch, bolster sectoral competitiveness, and sustain the growth trajectory of the Indian economy.