THE CASCADING EFFECT OF INVERTED DUTY STRUCTURE ON WORKING CAPITAL AND COMPLIANCE: AN EMPIRICAL ANALYSIS OF INDIA'S GST REGIME

The Goods and Services Tax (GST), implemented in India in 2017, aimed to eliminate tax cascading through a seamless Input Tax Credit (ITC) mechanism. However, the Inverted Duty Structure (IDS)—where input tax rates exceed output tax rates—has created a new form of fiscal distortion. This paper presents empirical evidence from 47 manufacturing firms across three IDS-affected sectors (pharmaceuticals, textiles, and fertilizers) to quantify the impact on working capital and compliance costs. Using firm-level financial data (2021-2024) and semi-structured interviews with tax practitioners, we find that IDS leads to an average working capital blockage of 8.3% of annual turnover, with refund processing times averaging 147 days despite the statutory 60-day limit. Regression analysis reveals that IDS intensity significantly predicts increased compliance costs (β = 0.67, p < 0.001) and reduced operational efficiency. Our findings suggest that while refund mechanisms provide temporary relief, fundamental rate rationalization is necessary to resolve this structural inefficiency. The study contributes to the literature on value-added tax design and implementation challenges in federal systems.