Under the Goods and Services Tax (GST) system, an inverted tax structure occurs when the tax rate on inputs or raw materials is higher than the tax rate on finished goods. This can result in higher input taxes paid by manufacturers, which can lead to an increase in the cost of production and reduce the competitiveness of the industry.
The inverted tax structure issue was addressed by the GST Council through a reduction in the tax rate on inputs and an increase in the tax rate on finished goods. This helps to reduce the tax burden on the manufacturing sector and promote the production of finished goods.
For example, let’s say the tax rate on raw materials or inputs is 18%, and the tax rate on finished goods is 12%. In this scenario, manufacturers will end up paying a higher tax rate on their inputs, which increases their cost of production. Consequently, the final price of the finished goods is also likely to increase, making it less competitive in the market.
To solve this issue, the GST Council has reduced the tax rate on inputs to 12% and increased the tax rate on finished goods to 18%. This helps to reduce the tax burden on the manufacturers and promote the production of finished goods. This also ensures that the tax burden is evenly distributed across the different sectors of the economy.