SMEs Face Rising Costs & Liquidity Pressure Due To Inverted Duty Structure: Empower India

ENA MSME 2026-04-02 16:42:16 New Delhi, Apr 2 (KNN) Indias small and medium enterprises (SMEs) are facing increasing financial stress due to the inverted duty structure (IDS) under the Goods and Services Tax (GST) regime, an Empower India note said, citing industry stakeholders. The anomaly arises when input tax rates exceed output tax rates, leading to accumulation of unutilised input tax credits and blocking working capital. This has resulted in rising costs and liquidity constraints, particularly for smaller firms with limited access to external financing. Impact on Competitiveness Micro, small and medium enterprises (MSMEs) operating on thin margins are being forced to either absorb these additional costs—affecting profitability—or pass them on to consumers, reducing their market competitiveness. The issue is further compounded by the exclusion of input services and capital goods from the refund mechanism, which limits recovery of legitimate tax credits. The impact is being felt across sectors such as pharmaceuticals, FMCG, insurance, e-commerce, edible oils and packaged foods, where input and service tax rates are often higher than output rates. Industry Calls for Policy Clarity Industry bodies have raised concerns over the structural limitations of the GST framework and called for reforms to restore tax neutrality. Empower India noted that inefficiencies in the input tax credit system are diluting the intended benefits of GST. K. Giri, Director General, Empower India, said, A predictable and efficient input tax credit framework is central to the success of GST. While recent revisions to the refund formula are a step forward, the continued exclusion of input services and capital goods constrains liquidity and creates cost pressures across sectors. Addressing these gaps will be important to ensure tax neutrality and support industry competitiveness, Giri added. Industry stakeholders have recommended expanding the refund mechanism to include input services and capital goods, amending provisions under the CGST Act, revising the definition of net input tax credit, and simplifying procedures with clearer guidelines. Compliance Challenges and Litigation Businesses are also facing uncertainty due to interpretational ambiguities in GST circulars related to refunds. Variations in implementation and changes in tax rates over time have led to increased litigation and compliance complexity. (KNN Bureau) 45671 https://knnindia.co.in/news/newsdetails/msme/smes-face-rising-costs-liquidity-pressure-due-to-inverted-duty-structure-empower-india 2026-04-02 16:42:16 knnindia.co.in SMEs Face Rising Costs & Liquidity Pressure Due To Inverted Duty Structure: Empower India