GST Reforms: Industry Seeks Safeguards Against Duty Inversion Risks

India is preparing for a landmark overhaul of its Goods and Services Tax (GST) regime, dubbed “GST 2.0.” While businesses welcome the idea of rate rationalisation to simplify compliance and boost affordability, industries have voiced a strong caution: rate cuts without alignment could create inverted duty structures, blocking input tax credits (ITC) and raising costs instead of lowering them.

What is Duty Inversion?

Definition: Duty inversion occurs when GST on raw materials and services (inputs) is higher than GST on the final goods or services.

Impact: This leads to large amounts of unused ITC, locking up working capital and creating dependence on government refunds—which are often delayed.

Expert View: Pratik Jain, Partner at PwC, warned that reducing GST slabs from 12% to 5% could worsen inversions, as most inputs will continue to be taxed at 18%. Unless refunds are allowed on services too, companies will be forced to raise prices instead of cutting them.

Industry-Wide Concerns Raised to Finance Ministry

Several sectors have approached the Finance Ministry, highlighting the risk of GST reforms backfiring:

Tractors

Pharmaceuticals

Medical devices

Chemicals

Fertilizers

Textiles

Insurance

Their common demand: Ensure rate alignment between inputs and outputs to avoid credit blockage and cost pressures.

Insurance Sector: Exemption vs. Zero-Rating

A full GST exemption for insurance could hurt companies by blocking ITC on services and supplies.

Experts suggest a 5% GST rate or extending zero-rating (currently for exports/SEZs) to insurance services.

This approach would allow ITC refunds, keeping costs under control while making health and life insurance more affordable.

Pharma Industry’s Inversion Worry

The pharmaceutical sector, one of India’s export champions, faces a serious inversion challenge:

Current tax rates: Formulations at 12% vs APIs at 18% → 6% inversion gap.

Post-reform risk: If formulations drop to 5%, the gap widens to 13%.

Consequences:

Price-controlled drugs: Margins shrink, risking shortages of essential medicines.

MSMEs: Liquidity crunch due to locked-up ITC and refund delays.

Exports: Funds tied up in API GST payments, affecting production and R&D.

AIOCD’s Demand (Chemists’ Association)

Medicines are lifelines, not luxury goods.

Essential drugs under DPCO should not face extra burden.

Suggested GST structure:

5% GST on most medicines and supplements.

0% GST on critical illness drugs (cancer, kidney, cardiac).

Industry’s Prescription for Pharma

Align APIs and formulations under the same slab:

Either 5% for affordability, or

12% for balanced revenue and cost efficiency.

Fast-track refund timelines (15–30 days).

Interest on delayed refunds to prevent backlog.

Special refund window for capital goods to support MSME modernisation.

Medical Devices: A Case for Calibrated GST

The medical device sector (AiMeD) cautions that GST reforms could disrupt domestic competitiveness if misaligned.

Current: Devices at 12% GST, inputs at 18% → inversion already exists.

Risks of reform:

5% GST on all devices → worsens inversion, discourages local production, makes imports cheaper.

18% GST → raises costs for hospitals and patients.

Balanced Approach Suggested:

Keep 12% GST for low-margin consumables (syringes, IV sets).

Allow 5% GST for high-value equipment to improve affordability.

Special Case: Rubber Gloves Industry

The Indian Rubber Gloves Manufacturers Association (IRGMA) highlighted that nitrile gloves face massive ITC accumulation due to very low value addition in a price-sensitive import-driven market. They have actually sought a higher 18% GST to balance credit utilisation.

Correcting Wider Anomalies in Healthcare

GST exemptions on hospitals and diagnostics create “embedded taxes” of 5–6% on consumables and equipment.

Rationalising these rates could reduce patient costs and make healthcare more efficient.

In Step with GST 2.0

Prime Minister Narendra Modi, in his Independence Day speech, assured that GST 2.0 will focus on fixing inverted duty structures, freeing up working capital, and boosting exports.

Industry leaders have urged the government to ensure reforms are balanced, sector-sensitive, and patient/consumer friendly.

Conclusion

GST reforms promise affordability and efficiency, but execution is critical. Unless input and output tax rates are aligned and refund mechanisms strengthened, the reforms could:

Worsen liquidity problems for MSMEs.

Block ITC and raise compliance burdens.

Increase costs instead of reducing them.

A calibrated GST structure, with parity between inputs and outputs and faster refund mechanisms, is the industry’s collective prescription to ensure GST 2.0 becomes a true enabler of growth, affordability, and global competitiveness.