The Unseen Burden: How GST Cuts and Blocked Input Tax Credit Are Stifling MSMEs and Retailers

While announcements of Goods and Services Tax (GST) rate reductions are often met with applause, they are casting a long, often unseen shadow over the financial health of Micro, Small, and Medium Enterprises (MSMEs) and a significant segment of retailers across the nation. What appears to be a benefit on the surface is, in reality, creating a severe liquidity crunch for countless businesses, threatening their operational stability and growth prospects.

The core of this escalating problem lies in the 'inverted duty structure' and the subsequent blockage of Input Tax Credit (ITC).

Simply put, an inverted duty structure arises when the GST rate on a business's inputs (raw materials, components, or services consumed) is higher than the GST rate on its final output (finished goods or services). When the GST Council decides to lower the tax rate on a finished product, while the rates on its inputs remain unchanged or higher, businesses end up accumulating a surplus of ITC.

This accumulated, unutilized ITC isn't just an accounting entry; it represents real working capital that is locked up with the government.

For MSMEs and retailers, who typically operate on tighter margins and have limited access to funds, this blockage translates directly into a significant cash flow problem. Imagine a manufacturer whose raw materials attract 18% GST, but their final product is now taxed at 12%. They pay more GST on what they buy than what they collect on what they sell, leading to a pile-up of credit that they cannot fully offset or claim back as a refund.

The current GST framework, in many instances, does not permit a refund for ITC accumulated due to an inverted duty structure, especially for certain services or specific goods.

This regulatory bottleneck exacerbates the financial strain, forcing businesses to either tie up precious capital or seek external funding, adding to their cost of doing business. This situation not only impacts their profitability but also makes them less competitive against larger players or those not affected by such a structure.

The consequences are far-reaching.

Businesses struggle to pay suppliers, meet operational expenses, or invest in expansion. This isn't just about financial inconvenience; it's about hindering the engine of economic growth. MSMEs are vital for job creation and innovation, and when they face such systemic hurdles, the entire economy feels the pinch.

Industry bodies and affected businesses are now urgently appealing to the GST Council to revisit these provisions.

There is a growing demand for policy adjustments that would allow for the refund of accumulated ITC arising from inverted duty structures across all sectors, thereby unlocking critical working capital and providing much-needed relief to these vulnerable segments. Addressing this issue is not merely a technical fix; it's a strategic move to foster a more equitable and conducive business environment for the backbone of our economy.