GST refund on inverted duty structure

GST refund on inverted duty structure

Inverted Duty Structure: – Inverted duty structure is a situation where in the inputs GST rate is more than the output or finished goods GST rate. For example in Type industry the GST rate on rubber type (output) is 5% and GST rate on natural rubber (inputs) is 10%. Here since the GST tax rate on input is higher than the GST rate on outputs or finished goods, this is called Inverted Duty Structure. In this article we discuss about the process and procedure of GST refund on Inverted duty structure.

GST Refund:- “Refund includes” refund of tax paid on Zero rated supplies or refund of tax paid on supply of Goods regarded as Deemed Export or refund of unutilised Input tax credit.

Refund of Unutilised Input Tax Credit:- As per Section 54(3) of CGST Act 2017, a registered person may claim refund of unutilised input tax credit only in following two cases:-

  1. Refund of Input Tax credit in respect of Zero rated supplies made without payment of tax (Read more about – GST refund on Zero rated supplies)
  2. Refund of unutilised Input Tax Credit under Inverted Duty Structure (other than nil rated or fully exempt supplies)

Input Tax Credit Refund Restriction 54(3):-

  1. Unutilised input tax credit refund shall not be allowed in cases where the goods which are exported out of India are subject to export duty.
  2. If supplier of goods or services takes benefit of duty drawback in respect of central tax then no refund of input tax credit is allowed.

GST Refund on Inverted Duty Structure:- Section 54(3) of CGST Act 2017 provides for refund of unutilised Input tax credit on account of Inverted duty tax structure. This section does not apply to the cases where output supplies are Nil rated or fully exempted.

Maximum Refund Calculation under Inverted duty Structure:- Rule 89(5) specify the following formula to calculate the maximum GST Refund under Inverted duty Structure.

 

Maximum GST Refund = {(Turnover of Inverted rated supply of goods and services) X Net ITC / Adjusted Total Turnover} – tax payable on such inverted rated supply of goods and services.

Let’s understand the various term used in above formula:-

Net ITC = ITC availed on inputs during the relevant period – ITC for which refund is claimed (i.e. ITC on inward supplies received under Deemed Export or ITC on inward supplies received under merchant exports or ITC on import of goods received by the EOU or ITC on import of goods received under AA/EPCG schemes)

Adjusted Total Turnover = (Turnover in a State or union territory + Turnover of Zero rated supply of services + Turnover of non Zero rated supply of services) – (Total Turnover of services + Turnover of exempted supplies other than Zero Rated supplies + Turnover in respect of deemed export and merchant export)                  

Turnover of Zero rated supply of services = Payment received for the zero rated supply of service during the period + Value of the zero-rated supply of services completed during the period for which payment had been received in advance in any period prior to the period under refund – Advances received for zero-rated supply of services for which the supply of services has not been completed in GST refund period.

Let’s calculated the GST Refund with the help of an example:-

Input “A” GST Rate = 5%

Input “B” GST Rate = 18%

Output “C” GST Rate = 12%

Output “C” value of supply = INR 3,000, let’s assume there is no other outward supplies so his adjusted total turnover shall also be INR 3,000 and output GST shall be INR 360 (3000*12%)

If we assume that Input “A” value of inward supply is INR 500 and Input “B” value of inward supply is INR 2,000 then Net ITC shall be equal to INR 385 (5005% + 200018%)

GST Refund = {(Turnover of Inverted rated supply of goods and services) X Net ITC / Adjusted Total Turnover} – tax payable on such inverted rated supply of goods and services.

GST Refund = {(3000) X 385 / 3000} – 360

= INR 25

Net Input does not include input on services or capital goods. The intent of law is not to allow refund of unutilised ITC on input services or capital goods.

It is also clarify that transitional credit cannot be treated as part of “Net ITC” and thus no refund of such unutilised transitional credit is admissible. (Point no 50 of Circular No 124/44/2019 dated 18th November 2019)

Time limit for GST refund Claim: – Registered persons may make refund application before the expiry of Two years from the “Relevant Date”. The relevant date in case of refund of unutilised Input tax credit due to Inverted duty Structure, shall be due date of the return for the tax period in which such claim for refund arises.

Relevant Circular and Notification pertain to GST Refund on Inverted Duty Structure:-

A. CBIC vide Circular No 135/05/2020 dated 31st March 2020 clarified in point No 3 of the circular that refund of accumulated ITC under Section 54(3)(ii) of the CGST Act would not be applicable in cases where the input and the output supplies are at same rate or Refund of unutilised ITC on account of reduction in GST Rate.

For example if an applicant purchased goods “A” which attract 18% GST. However, subsequently the rate of GST on goods “A” has been reduced from 18% to 12%. In such case since the input and output being the same tax rate but attract different tax rate at different points of time. It is clarified by the CBIC that refund in such cases would not be admissible.

B. CBIC vide Circular No 135/05/2020 dated 31st March 2020 clarified in point No 5 of the circular that refund of invoices not allowed if the Invoices are not populated in GSTR 2A. In this circular in point no 6 there is New requirement to mention HSN/SAC in Annexure B. Annexure B is provided in circular no 125/44/2019 date 18th November 2019.

C. Notification No 5/2017 Central Tax (Rate) dated 28th June 2017 as amended by Notification No 44/2017 Central Tax (Rate) dated 14th November: – In the said notifications the Government has notified the following goods in respect of which refund of unutilised input tax credit will not be admissible.

  1. Silk or of silk waste woven fabrics – 5007
  2. Wool or of animal hair woven fabrics – 5111 to 5113
  3. Woven fabrics of cotton – 5203 to 5212
  4. Other vegetable textile fibres woven fabrics, paper yarn – 5309 to 5311
  5. Manmade textile materials woven fabrics– 5407, 5408
  6. Woven fabrics of manmade staple fibres – 5512 to 5516

6A. Knotted netting of twine, cordage or rope; made up fishing nets and other made up nets, of textile materials – 5608

6B. Corduroy fabrics – 5801

6C. Narrow woven fabrics other than goods of heading 5807, narrow fabrics consisting of warp without weft assembled by means of an adhesive (bolducs) – 5806

  1. Knitted or crocheted fabrics [All goods] -60
  2. Rail locomotives powered from an external source of electric accumulators or by electricity – 8601
  3. Other rail locomotives; locomotive tenders such as Steam locomotives, Diesel-electric locomotives and tenders thereof -8602
  4. Self-propelled railway or tramway coaches, vans and trucks, other than those of heading 8604 – 8603
  5. Maintenance of railway or tramway or service vehicles whether or not self-propelled (for example:- cranes, workshops, trackliners, ballast tampers, testing coaches and track inspection vehicles) – 8604
  6. Not self propelled passenger coaches of railway or tramway, luggage vans, Not self propelled post office coaches and other special purpose railway or tramway coaches not (does not include heading 8604) – 8605
  7. Not self propelled railway or tramway goods vans and wagons– 8606
  8. Railway or tramway locomotives or rolling-stock parts such as bissel-bogies, bogies, axles and wheels and parts thereof – 8607
  9. Fixtures and Fittings of railways or tramway track, signaling of mechanical including electro mechanical, safety or traffic control equipment for railways, tramways, roads, inland waterways, parking facilities, port installations or airfields; parts of the foregoing – 8608

D. CBIC vide Circular No 18/18/2017 dated 16th November 2017 clarify that restriction on refund of unutilised input tax credit in above notification no 5/2017 Central Tax (Rate) dated 28th June will not be applicable to Zero rated supplies.

E. Circular no 125/44/2019 dated 18th November 2019 prescribed list of all statements / declaration / undertakings / certificates and other supporting documents to be provided along with the refund application.

According to circular, In respect of GST refund on Inverted duty structure following declaration or supporting documents to be required.

  1. Declaration under 2nd proviso and 3rd proviso to section 54(3)
  2. Declaration under section 54(3)(ii)
  3. Undertaking in relation to sections 16(2)(‘C) and section 42(2)
  4. Statement 1 under rule 89(5)
  5. Statement 1A under rule 89(2)(h)
  6. Certification under rule 89(2)(3) in case refund claimed exceed INR two Lakh.
  7. In case refund claimed does not exceed INR two Lakh then only self declaration under rule 89(2)(1).
  8. Copy of GSTR 2A of the relevant period
  9. Statement of Invoices in Annexure B as provided in circular no 124/44/2019

 

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