Inverted GST: I Experienced This While Exporting Tea
GST sounds simple: you buy inputs, pay GST, claim Input Tax Credit (ITC) and use that credit against your output tax.
But things can become complicated when the GST rate on your inputs is higher than the rate applicable to your output.
I experienced this while exporting Assam tea packed in jars.
The tea I purchased was subject to around 5% GST, while the jars I purchased carried a much higher GST rate, around 18%.
There were also other packaging expenses such as labels, stickers and printing, where the applicable GST could be higher depending on their classification.
So I had a situation where:
Tea → 5% GST
Packaging input → much higher GST
This created a significant ITC balance.
What Is Inverted GST?
An inverted GST structure broadly occurs when the GST rate on inputs is higher than the GST rate on the output.
For example:
| Input/Output | Illustrative GST |
|---|---|
| Raw material | 5% |
| Packaging | 18% |
| Labels/printing | Depends on classification |
| Final product | 5% |
The difference can result in accumulation of unutilised ITC.
Section 54(3) of the CGST Act provides for refund of unutilised ITC in specified circumstances, including certain cases where the tax rate on inputs is higher than the rate on output supplies.
My Tea Export Experience
The problem became more noticeable because I was exporting.
Exports are zero-rated supplies under GST. An eligible exporter can export under LUT without payment of IGST and claim a refund of eligible unutilised ITC, subject to the applicable rules.
So I initially thought:
“If I am exporting, I should get the GST I paid on my purchases back.”
But it isn’t always that simple.
The GST paid on my jars and other inputs had already gone out of my business.
The resulting ITC was sitting in the GST system, while I still needed cash for:
- New tea purchases
- Packaging
- Freight
- CHA/customs expenses
- Other business expenses
That is where GST can become a working-capital issue for a small exporter.
ITC Does Not Automatically Mean Cash
Suppose your GST ledger shows ₹1 lakh of ITC.
That does not mean you have ₹1 lakh available in your bank account.
ITC is a tax credit. It can be utilised against eligible tax liabilities or refunded where the law permits.
And the amount eligible for refund depends on the applicable refund provisions and calculations.
For inverted-duty refunds, Rule 89(5) provides a prescribed formula.
The GST Council has published an example where inputs attract 5% and 18% GST, while the output attracts 12% GST. In that example, ₹385 of Net ITC resulted in a maximum refund of ₹25 under the prescribed calculation—not ₹385.
That shows why:
Accumulated ITC and refundable ITC are not necessarily the same amount.
How My Tea Business Fits the Picture
My situation was specifically an export transaction, so it should not be treated as exactly the same as the GST Council’s domestic inverted-duty example.
But the underlying issue was familiar:
Tea → lower GST
Jar → higher GST
Other packaging inputs → potentially higher GST
Export → zero-rated
Although I received a GST refund, it was less than the total GST I had accumulated in the way I had initially expected.
That experience taught me that GST can affect an exporter’s cash flow, not just tax compliance.
What Should MSMEs Watch?
If your business uses significant packaging or other inputs, calculate the GST impact across your entire supply chain.
Look at:
Raw materials + packaging + labels/printing + other inputs
versus
GST applicable to your output
For exporters, also understand whether you are exporting under LUT without payment of IGST and which refund mechanism applies to your transaction.
And if substantial ITC is involved, discuss the calculation with your CA/GST professional before making assumptions about the refund.
Inverted GST in One Line
When GST on relevant inputs is higher than GST on the output, ITC can accumulate—and that accumulated credit can have a real impact on an MSME’s working capital.
Official GST Sources
- CBIC — GST Refund Rules
- CBIC — Master Circular on GST Refunds
- GST Council — Inverted Duty Structure & Rule 89(5)
- GST Council — Official Example of 5% and 18% Inputs
Yes. For the article, I recommend using only official Government of India sources. These are the strongest references for the claims we are making:
Authentic GST sources & references
- CBIC — CGST Act, Section 54: Refund of Tax
Covers refund of unutilised ITC, including zero-rated supplies and accumulation where the input tax rate is higher than the output tax rate.
CBIC — CGST Act, Section 54 - CBIC — GST Refund Rules
Covers the practical refund rules, including refund applications and the formula for refund of ITC relating to exports made without payment of IGST under LUT.
CBIC — GST Refund Rules - CBIC — CGST Rules, Rule 89(5)
This is the actual Government source for the formula for refund on account of inverted duty structure.
CBIC — CGST Rules: Rule 89(5) - GST Council — Inverted Duty Structure clarification
This is particularly useful for your article because it specifically discusses multiple inputs with different GST rates, including inputs at 5% and 18%, and an output at 12%. The official example calculates ₹385 of Net ITC but a maximum refund of ₹25.
GST Council — Inverted Duty Structure & Rule 89(5) Example - GST Council — Scope and computation of inverted-duty refund
Another official GST Council document discussing Section 54(3), accumulated ITC and inputs/packing materials carrying higher GST rates than the output.
GST Council — Scope & Computation of Inverted-Duty Refund
Best references to put at the bottom of your article
I’d use these four:
Official GST References
- CBIC — CGST Act, Section 54: Refund of Tax
- CBIC — GST Refund Rules
- CBIC — CGST Rules, Rule 89(5)
- GST Council — Inverted Duty Structure: Official Example
These are primary government sources, not secondary GST blogs, so they are much better for establishing BusinessZindagi’s credibility.
Add about author, and clickable link
Here is the About the Author section with the clickable BusinessZindagi link:
About the Author
Tabrez is an entrepreneur, tea exporter and the founder of BusinessZindagi, a platform focused on practical information, tools and resources for MSMEs, entrepreneurs and exporters.
Through BusinessZindagi, he shares lessons from his own business journey, including tea exports, export documentation, packaging, working capital, GST and the practical challenges faced by small businesses.
His approach is simple: learn from real business experience and make it useful for other entrepreneurs.
Give relevant businesszindagi.com’s article and resources Clickable links
Yes. For this article, I’d add a “Related BusinessZindagi Resources” section with links that are genuinely relevant to the reader’s journey—not a long list.
Related BusinessZindagi Resources
- How to Start Tea Export From India — A practical guide covering tea exports, documentation, markets and my own experience as a tea exporter.
- The Ultimate Guide to Export Packaging — Useful if you are dealing with packaging materials, packaging costs and export shipments.
- Tea Packaging: Real Opportunities & Hidden Risks — My practical experience with tea packaging, including the costs and risks involved.
- Why Understanding Product Volume Is Critical Before Finalizing Packaging — Another real lesson from my tea-export experience involving jar packaging.
- First Export Order: Proforma Invoice, CHA, Shipping Bill & Port Choice — Practical guidance for entrepreneurs preparing their first export shipment.
- Export Profit Calculator — Use BusinessZindagi’s export resources to calculate the broader economics of an export order, including costs that can affect your actual margin.
About the Author
Tabrez is an entrepreneur, tea exporter and the founder of BusinessZindagi, a platform focused on practical information, tools and resources for MSMEs, entrepreneurs and exporters.
Through BusinessZindagi, he shares lessons from his own business journey, including tea exports, export documentation, packaging, working capital, GST and the practical challenges faced by small businesses.
His approach is simple: learn from real business experience and make it useful for other entrepreneurs.