The Inverted Duty Structure (IDS) is a concept in the Indian tax regime, particularly under the Goods and Services Tax (GST), where the tax rate on inputs (raw materials or services) is higher than the tax rate on the final output supply. This anomaly, which also existed in the pre-GST era with import duties, leads to an accumulation of unutilized Input Tax Credit (ITC) because the business pays more tax on purchases than it collects on sales. The problem it addresses is the blockage of working capital caused by this accumulated ITC.
The mechanism to resolve this is the refund of the accumulated ITC, which is provided for under Section 54(3) of the Central Goods and Services Tax (CGST) Act, 2017. The maximum eligible refund amount is calculated using a specific formula prescribed in Rule 89(5) of the CGST Rules.
The structure has seen recent changes and clarifications. The Supreme Court, in the judgment Union of India vs VKC Footsteps India Private Limited (2022), upheld that the refund under Rule 89(5) is restricted to ITC on input goods and input services, expressly excluding ITC on capital goods. Furthermore, the formula in Rule 89(5) was amended by Notification No. 14/2022-Central Tax dated July 5, 2022, to explicitly allow the refund of unutilized ITC on input services. A significant recent change was the amendment to Section 54(6) of the CGST Act by the Finance Act 2026, which extended the provision for a provisional refund (90% within seven days) to claims arising from the inverted duty structure, a facility previously limited to zero-rated supplies.