Inverted Duty Structure under GST: Refund Calculation & Practical Issues

Inverted Duty Structure under GST: Refund Calculation, Section 54(3), Rule 89(5) & Practical Issues

Introduction

The concept of Inverted Duty Structure under GST is one of the most litigated and practically challenging areas, particularly in the context of GST refund on accumulated Input Tax Credit (ITC).

Businesses operating under the inverted duty structure under GST often face:

• Working capital blockage
• Frequent GST refund claims
• Departmental scrutiny and GST refund notices

This article provides a practical guide on how to claim refund under the inverted duty structure, including refund calculation under Rule 89(5), documentation, and common issues.

What is Inverted Duty Structure?

Section 54(3) of the CGST Act, 2017 provides for refund of accumulated ITC under GST. However, such refund is allowed only where the accumulation arises due to:

i. Zero-rated supplies made without payment of tax; or

ii. Where the credit has accumulated on account of the rate of tax on inputs being higher than the rate of tax on output supplies (other than nil-rated or fully exempt supplies), i.e., Inverted Duty Structure (IDS)

Thus, Inverted Duty Structure under GST refers to a situation where the tax rate on inputs is higher than the tax rate on outward supplies, leading to accumulation of ITC.

Example:

• Input purchase taxed at 18%
• Output supply taxed at 5%

Result:

• Excess ITC accumulates in the electronic credit ledger
• Such accumulation is eligible for GST refund under Section 54(3), subject to conditions

Legal Framework

Refund under IDS is governed by:

• Section 54(3) of the CGST Act, 2017 – as discussed above.
• Rule 89(5) of the CGST Rules, 2017

In the case of refund on account of inverted duty structure, refund of input tax credit shall be granted as per the following formula:-

Explanation: – For the purposes of this sub-rule, the expressions –

(a) “Net ITC” shall mean input tax credit availed on inputs during the relevant period; and

(b)”Adjusted Total Turnover” and “relevant period” shall have the same meaning as assigned to them in sub-rule (4).

 Key Components Explained:

• Net ITC: ITC availed on Inputs (input of services and capital goods are not considered)
• Turnover of inverted rated supply: Value of outward supplies attracting lower GST rate
• Adjusted Total Turnover: Total turnover excluding exempt and non-GST supplies
• Tax payable: Output GST liability on inverted supplies

Let’s understand this with example:

–

–

–

Documents to be submitted along with the refund application  

For a smooth refund process, ensure availability of:

• GSTR-1 and GSTR-3B returns
• Annexure- B (Invoice-wise ITC details along with details of HSN and broad description)
• Sales Register (Invoice-wise Sales details)
• RFD Statement 1A (Portal utility of uploading invoice details)
• GSTR 2B for the relevant period
• CA certificate (if refund amount exceeds 2 lakhs)
• Undertakings and declarations
• Purchase invoices
• Working calculation sheet as per Rule 89(5)

 Common issues

1. What are the implications if a taxpayer has export turnover which is taxed at a rate falling under an inverted duty structure? Will it be included in inverted turnover and eligible for refund? If not, will it be included in adjusted total turnover?

Export turnover shall not be considered as part of inverted duty turnover, even if it is supplied on payment of tax and at the tax rate which is eligible for inverted duty. Since the proviso to section 54(3) clearly states as follows.

“Provided also that no refund of input tax credit shall be allowed, if the supplier of goods or services or both avails of drawback in respect of central tax or claims refund of the integrated tax paid on such supplies.”

Further, a declaration is provided while filing the refund application stating that we have not claimed any refund in this regard.

However, the Hon’ble Madras High Court in VSM Weavess India (P.) Ltd 2024 (82) G.S.T.L. 402 (Mad.) has taken a favourable view by allowing inclusion of export turnover in the numerator of the refund formula.

The above position is subject to litigation and may vary depending on jurisdiction.

With respect to inclusion of such turnover, Rule 89(4) of the CGST Rules, 2017 defines Adjusted Total Turnover as follows:

 “Adjusted Total Turnover” means the sum total of the value of-

(a) the turnover in a State or a Union territory, as defined under clause (112) of section 2, excluding the turnover of services; and

(b) the turnover of zero-rated supply of services determined in terms of clause (D) above and non-zero-rated supply of services, excluding the value of exempt supplies other than zero-rated supplies during the relevant period

Accordingly, export turnover is included in adjusted total turnover.

2. Which are the industries where inverted duty refund situations arise?

Inverted Duty Structure is commonly observed across industries such as textiles, footwear, chemicals, pharmaceuticals, plastics and packaging, printing and paper products, fertilizers, electric vehicle manufacturing, sugar mills, drone manufacturing, job work and contract manufacturing units, ceramics, corrugated box manufacturing, and other low-rate consumer goods sectors where the GST rate on inputs exceeds that on outward supplies, leading to accumulation of input tax credit and consequent refund claims.

3. We have the same GST rate on inward and outward supplies; however, ITC is accumulating due to input services taxed at 18%. Since margins are low, the ITC cannot be fully utilized. Are we eligible for refund?

No, refund cannot be claimed under the inverted duty structure in such cases, since the refund mechanism allows only ITC on input goods to be considered as “Net ITC.” ITC on input services is not eligible for refund under IDS.

4. If inputs are procured at a higher rate and outputs are taxed at a lower rate, and significant ITC has accumulated due to bulk purchases resulting in inventory buildup, can refund be claimed on the entire ITC or only on inputs actually consumed?

There is no explicit restriction under the law mandating that ITC considered for refund must be limited to inputs consumed in outward supplies. However, the department may seek verification of manufacturing or stock records.

Accordingly, it is advisable to maintain proper documentation and demonstrate that such inputs (including those held in inventory) are intended to be used for making outward supplies eligible for inverted duty refund.

5. Is refund under the inverted duty structure allowed if only one input is taxed at a higher rate than the output?

Yes, if accumulation of ITC arises due to such rate disparity, refund under the inverted duty structure can be claimed, provided all other conditions are satisfied.

Conclusion

Inverted Duty Structure, while providing a mechanism for refund, is highly technical and subject to significant departmental scrutiny. Any errors in computation, documentation, or interpretation may result in rejection of the refund claim, issuance of notices, and potential litigation exposure. Accordingly, it is essential for businesses to adopt a structured, compliant, and well-documented approach to ensure successful claim and sustainability of IDS refunds.

Given the evolving jurisprudence and increasing scrutiny by tax authorities, businesses must ensure that their refund claims are legally sound, technically accurate, and adequately supported by proper documentation. Adopting a practical and proactive approach in preparing such claims can significantly reduce the risk of disputes and also help in achieving faster and smoother refund realization timelines.

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