On paper, the business was doing everything right — sales were up, the GST rate cut had made its product more competitively priced, and its books showed a healthy, growing input tax credit balance. In the bank account, none of that healthy paper position translated into cash the business could actually spend, and the gap between the two very nearly forced it to turn away a large new order.
A mid-sized textile manufacturer supplying finished fabric to garment exporters had, for years, run on comfortable margins under the pre-GST 2.0 rate structure. When the rate rationalisation took effect in September 2025, its finished product moved down into the 5% GST slab — good news, on the surface, since it made the product more price-competitive against imports and other domestic suppliers.
Where the Good News Turned Into a Problem
The manufacturer's major inputs — dyeing chemicals, specialised machinery maintenance services, and a range of processing services it outsourced to job workers — largely remained taxed around 18%. That created a textbook inverted duty structure: GST paid on inputs at 18%, GST collected on the finished product at only 5%. Every unit sold generated more input tax credit than it consumed, and that credit had nowhere productive to go except to accumulate, month after month, as a growing balance the business could only recover as a cash refund — a process with its own delays, its own documentation burden, and its own waiting period.
Within about eight months of the rate change, the accumulated, unrefunded credit had grown to a sum large enough to represent a genuinely significant share of the company's working capital — money that, in an accounting sense, belonged to the business, but that it could not touch, spend, or use to fund a new order without first navigating a refund claim.
The Moment It Actually Became a Crisis
The problem stopped being theoretical when a long-standing export client offered a significantly larger order than usual — good news that required the manufacturer to buy a large batch of dyeing chemicals and processing capacity upfront, in cash, well before the finished fabric could be sold and any GST collected on the output side. With a meaningful share of its working capital already locked inside an unrefunded credit balance, the business found itself short of the cash needed to actually fulfil the order it had just won — a genuinely absurd position for a company that was, by every conventional measure, profitable and growing.
How the Gap Actually Got Closed
The fix wasn't a single dramatic move — it was three things done properly and simultaneously. First, a formal refund application for the accumulated inverted-duty credit was filed with complete, properly reconciled documentation, rather than the partial, reactive filings the business had been submitting previously, which had been generating repeated department queries and slowing the process considerably. Second, the business restructured a portion of its input procurement — negotiating a shift of some processing work in-house rather than outsourced, specifically to reduce the volume of 18%-taxed input services feeding the inversion. Third, and most immediately useful for the pressing order, a short-term working capital facility was arranged against the pending, properly documented refund claim itself — banks are considerably more willing to lend against a well-documented, plausible refund receivable than against a vague description of "GST issues."
The Lesson for Any Business in a Similarly Inverted Sector
If your business sits in textiles, food processing, electric vehicles, or another sector where your inputs are taxed meaningfully higher than your output — and a genuinely significant number of Indian manufacturers now do, following GST 2.0 — an accumulating credit balance is not a problem that resolves itself with time; it compounds, and it silently erodes the working capital you actually need to grow, right at the moment growth becomes available. Treating your refund claims as a routine, proactively managed monthly discipline, rather than an occasional catch-up exercise, is the difference between a healthy credit position on paper and cash you can genuinely put to work.