New Delhi [India], April 17 : The inverted duty structure resulting from rate changes under the Goods and Services Tax (GST) 2.0 regime is hurting companies especially in the FMCG and over-the-counter (OTC) pharma sectors, with high input-side taxation on key services leading to accumulation of credits, Khaitan & Co Indirect Tax Partner, Sudipta Bhattacharjee toldon Friday.
"The whole issue of inverted duty structure emerging after GST 2.0 has started hurting a lot of companies in the FMCG or over-the-counter drugs business," Bhattacharjee said.
Citing the reason for the same, he said this is mainly "because for them there is a massive expense on the input side for services like which marketing and advertising services on which there is 18 per cent GST which is getting accumulated because you don't get an inverted duty refund for those input side services."
He added that the issue is one of the key concerns flagged to the government, with expectations that authorities may "do something to mitigate this problem."
Highlighting another major concern, Bhattacharjee pointed to the removal of GST compensation cess and its impact on businesses.
He noted that companies are now left with significant accumulated credits of input side compensation cess that have effectively turned into unusable assets.
"Now that compensation cess has been done away with, a lot of companies are sitting on massive amounts of input side GST compensation cess accumulated credit. All of those were assets and now all of that has become worthless effectively. So that will certainly hit their P&L in some form," he said, adding that the issue could trigger wider litigation across sectors.
He further observed that industry bodies, including automobile dealers, have already approached the Supreme Court, and more players are likely to follow.
"One way to avoid the litigation entirely would have been to provide some sort of a transitional mechanism; without such a mechanism, I foresee this becoming a much larger multi-sector litigation" he said.
On India's expanding network of free trade agreements (FTAs), Bhattacharjee flagged concerns around the implementation of rules of origin, particularly under the Customs (Administration of Rules of Origin under Trade Agreements) Rules, commonly referred to as CAROTAR.
He explained that while FTAs provide for certificates of origin, Indian customs laws require a more detailed "proof of origin," allowing authorities to seek extensive information on manufacturing processes and value addition at the end of the foreign exporter, which can be highly sensitive at times.
"That can lead to a lot of friction, delays, unnecessary litigation," he said, adding that strict implementation of the CAROTAR rules may discourage businesses seeking preferential tariff benefits under the various free trade agreements.
On the long-pending issue of taxation in the online gaming sector, he said the Supreme Court's judgment, reserved in August 2025, is expected soon and will be "a momentous judgement for the entire sector."
However, he noted that many companies have already shut down or pivoted, limiting the practical impact of the verdict.
Bhattacharjee also acknowledged improvements in GST compliance due to increased digitisation and better reconciliation systems, but said the regime remains complex and heavily data-driven, especially for MSMEs.
"The GST compliance as a whole has become very data-driven, very complex, very system-driven," he said, suggesting that simplification in implementation and greater sensitisation at the officer level could improve ease of doing business.
On the broader structure of GST, he noted that while expanding its coverage to include petroleum products and alcohol could simplify the tax regime, such a move is unlikely in the near term due to states' fiscal dependencies.
Commenting on the global trade environment, he stressed the need to return to a rules-based international order, warning that the current landscape is increasingly driven by unilateral actions and bilateral arrangements.
"I just hope that at some point in time we can go back to the good old days where there was at least some semblance of a rules-based international order," he said.
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