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GST Working Capital Impact 2025: How Inverted Duty Corrections Will Transform Business Cash Flows

Updated: Sep 20

GST Working Capital Impact 2025

Infographic showing India's GST reforms 2025 including simplified tax slabs of 5%, 18%, and 40%, correction of inverted duty structures in textiles and fertilizers, anInfographic showing India's GST reforms 2025 including simplified tax slabs of 5%, 18%, and 40%, correction of inverted duty structures in textiles and fertilizers, and unlocking of working capital to boost business liquidity and economic growthd unlocking of working capital to boost business liquidity and economic growth
Visual summary of India's landmark GST reforms effective September 22, 2025, showcasing the simplified 5%, 18%, and 40% tax slabs, correction of inverted duty structures in textiles and fertilizers, and the unlocking of significant working capital to boost economic growth and ease of doing business

GST Working Capital Impact 2025

The September 2025 GST reforms go beyond headline rate cuts—instead, they unlock a latent ₹2-3 lakh crore of working capital trapped in input tax credits (ITC) by correcting inverted duty structures and fast-tracking refunds. This focused reform will be a game-changer for manufacturers, exporters, and insurers alike.


What Is the Inverted Duty Structure?

An inverted duty structure occurs when GST on inputs exceeds the GST on outputs, forcing businesses to accumulate unusable ITC. Key examples before September 2025:

  • Man-made fibers at 18% vs. yarn at 12%

  • Fertilizer inputs (sulphuric/nitric acid) at 18% vs. end-products at 5%


How the 2025 Reforms Unlock Cash Flows

  1. Textiles Sector:

    • Inputs (fiber) GST cut from 18%→5% and yarn from 12%→5% reverses years of blocked credits.

    • Estimated immediate ITC release: ₹8,000 crore for large MMF mills.

  2. Fertilizer Industry:

    • GST on acid inputs cut from 18%→5%, aligning with final fertilizer GST.

    • Frees up over ₹2,000 crore of working capital in H1 FY 2025-26.

  3. Fast-Track Refunds:

    • New 90% provisional refund mechanism for exporters and inverted-duty claims from Nov 2025 onward accelerates cash recovery.

  4. Insurance Sector Complexity:

    • Zero-rating of individual health/life policies enhances affordability but forces insurers to reverse accumulated ITC on operational costs by Sept 21.

    • Insurers should provision for one-time outflow up to 1% of GWP (gross written premium).


Strategic Actions for Businesses

  • Immediate ITC Audit:  Complete a detailed ITC balance audit before Sept 22 to quantify credits at pre-reform rates; these can offset future GST liabilities, creating temporary arbitrage.

  • ERP & Cash-Flow Planning:  Update billing systems to new rates, and model cash-flow impacts under both reversal (insurance) and refund acceleration (manufacturers).

  • Proactive Refund Claims:  File refund applications early under the new 90% provisional mechanism to maximize liquidity.

  • Contract & Pricing Review:  Renegotiate supplier contracts and customer pricing to reflect input cost savings and avoid margin erosion.


Long-Term Implications

Unlocking trapped ITC and speeding refunds will significantly reduce financing costs, strengthen balance sheets, and spur capex in export-oriented and capital-intensive industries. Insurers’ temporary cash outflows will normalize within the financial year, while policy affordability should drive premium growth.




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