Inverted Duty Structure

Context (PIB): The Budget proposes a comprehensive rationalization of the GST tax structure along with a review of the Custom Duty rate structure to support domestic manufacturing.

What is an Inverted Duty Structure?

• Definition: An inverted duty structure occurs when the taxes on input items are higher compared to the tax on the final product.
• Inverted Tax Cases: This can also happen when the inputs are taxed but the final output good is tax-exempt (zero/nil rated).

Impact of Inverted Duty Structure

• Cost Implications: Expensive inputs make products costlier, hindering their competitiveness in the export market. In the domestic market, such products are vulnerable to cheaper imports.
• Domestic Production: It discourages local production as importing finished products becomes cheaper than producing them domestically.

Implications

• Discouragement of Domestic Production: Higher taxes on inputs can lead to higher costs for domestic manufacturers, making it less economical to produce goods locally.
• Competitiveness: Products become less competitive both in the export market and against cheaper imports in the domestic market.

Proposed Solutions

• GST and Custom Duty Rationalization: The proposed rationalization aims to adjust the tax structure to support domestic manufacturing by addressing the imbalances created by the inverted duty structure.