👟 GST 2.0 Impact
on Shoe Manufacturing Industry & Inverted ITC Refund

🏭 Complete Guide for Footwear Manufacturers (GST Rates, Cash Flow & Refund under Section 54(3))

India’s footwear (shoe) manufacturing industry is a major MSME-driven sector, supporting employment, exports, and domestic consumption. With the introduction of GST 2.0, the Government reduced GST on affordable footwear to boost demand — but this has also increased Inverted Duty Structure for manufacturers.

As a result, many shoe factories now face continuous ITC accumulation and working capital blockage.

This detailed guide explains:

✅ GST 2.0 impact on shoe manufacturing
✅ Latest GST rate on shoes and raw materials
✅ Why cash flow gets stuck
✅ What is inverted ITC
✅ Refund eligibility under Section 54(3)
✅ Rule 89 calculation method
✅ Step-by-step refund process
✅ Practical GST tips for footwear units

👟 Overview of GST on Shoe / Footwear Manufacturing

Shoes and footwear fall under HSN Chapter 64. Manufacturing typically involves:

• PU / EVA / PVC / Rubber soles

• Leather / rexine / fabric uppers

• Adhesives & chemicals

• Foam & padding

• Accessories and packaging

Most of these inputs attract higher GST, while finished mass-market shoes attract lower GST, creating inverted duty.

📊 GST Rate on Shoes After GST 2.0 (Effective 22 September 2025)

👟 GST on Finished Footwear

👉 Most MSME shoe manufacturers fall in the 5% category, which directly leads to inverted ITC.

🧱 GST Rate on Major Inputs Used in Shoe Manufacturing

⚠️ GST 2.0 Impact on Shoe Manufacturers

GST 2.0 reduced output GST on affordable footwear to 5%, but raw materials still attract 12–18% GST.

This causes:

🔻 Lower output tax
🔺 Higher input tax
📈 Accumulation of ITC
💰 Working capital blockage

So while demand improves, cash gets locked in GST ledger unless refund is claimed.

💸 How Cash Flow Gets Stuck – Simple Example

Monthly Purchase (Raw Material)

• Purchase value: ₹10,00,000

• GST @18% = ₹1,80,000 (ITC available)

Monthly Sales (Shoes below ₹2,500)

• Sales value: ₹12,00,000

• GST @5% = ₹60,000

ITC Adjustment

• Total ITC = ₹1,80,000

• Output GST = ₹60,000

• ITC utilised = ₹60,000

❌ ITC Remaining Blocked

👉 ₹1,20,000

This ₹1,20,000:

❌ Cannot be withdrawn
❌ Cannot pay salary or rent
❌ Keeps accumulating monthly

This is Inverted Duty Structure — and it directly impacts working capital.

🧾 What is Inverted Duty Structure in Footwear?

Inverted duty arises when:

GST on inputs > GST on finished shoes

Since most footwear sells at 5%, while inputs are 18%, inversion becomes structural.

To solve this, GST law allows refund.

📘 Refund of Inverted ITC – Section 54(3) of CGST Act

Refund of unutilised ITC is permitted only in two cases:

✅ Zero-rated supplies (exports under LUT/Bond)

✅ Accumulation due to Inverted Duty Structure

For domestic shoe manufacturers, refund generally applies under:

👉 Section 54(3)(ii) – Inverted Duty Structure

⚠️ Important Legal Limitation

For inverted refund:

🔴 Only ITC on INPUT GOODS is refundable

Refund does NOT include:

❌ Input services (rent, electricity, freight, job work)
❌ Capital goods (machinery, moulds, tools)

So manufacturers must segregate:

• Input goods ITC (eligible)

• Input services ITC (not eligible)

📐 Refund Calculation – Rule 89

Refund is computed using Rule 89(5):

Refund Amount =

(Turnover of inverted rated supply × Net ITC ÷ Adjusted Total Turnover) − Tax payable on such inverted supply

Where:

• Net ITC = ITC on input goods only

• Turnover of inverted supply = value of shoes taxed at lower rate

• Adjusted Total Turnover = total taxable turnover

🖥️ Step-by-Step Refund Process (RFD-01)

Step 1

File GSTR-1 & GSTR-3B and reconcile with GSTR-2B

Step 2

Prepare working:

• Input GST (goods only)

• Output GST

• Product-wise turnover

• Rule 89 calculation

Step 3

File FORM GST RFD-01 on portal → select:

👉 Refund of ITC on account of Inverted Duty Structure

Attach:

📄 Invoice statements
📄 Refund computation
📄 GSTR-2B reconciliation
📄 Declarations
📄 Bank details

Step 4

Department verifies and issues refund (normally within 60 days).

🛠️ Practical GST Tips for Shoe Manufacturers

✔ Maintain HSN-wise product mapping
✔ Separate input goods & services in accounts
✔ Track sole, leather & chemicals separately
✔ Monthly GSTR-2B reconciliation is mandatory
✔ File refunds quarterly/monthly
✔ Maintain BOM linkage with GST invoices
✔ Keep inverted products in separate ledger groups

✅ Conclusion

GST 2.0 has made affordable shoes cheaper, helping demand — but it has also created permanent inverted duty structure for most footwear manufacturers.

Without regular refunds:

📉 Cash flow suffers
📈 Bank dependence increases
🚫 Growth slows

By properly using Section 54(3) read with Rule 89, shoe manufacturers can unlock blocked ITC and convert GST compliance into a financial advantage.

With structured GST management, footwear units can:

👟 Improve liquidity
🏭 Reduce working capital blockage
📊 Avoid refund disputes
📈 Strengthen profitability

Contact Our Financial Advisor for expert GST compliance and GST Refund support.