GST Refund in case of Inverted Duty Structure

Hello everyone. Today we would like to throw some light on GST refund in case of Inverted Tax Structure. In case you have some queries with respect to the same do mail us to enable us to provide you with clarification on the same.

Introduction: Where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies (other than nil rated or fully exempt supplies), except supplies of goods or services or both as may be notified by the Government on the recommendations of the Council. In such cases also, refund can be applied under Section 54 of the CGST Act, 2017 read with Rule 89 of the CGST Rules, 2017.

Time Limit: As per Section 54(1) of CGST Act 2017 refund can be applied by registered taxable person within 2 years from the end of return date.

Exceptions:  

1. Output supplies are NIL rated or fully exempt supplies of goods or services or both as may be notified by Government.

2. Goods exported out of India are subject to export duty.

3. Supplier claims refund of output tax paid under IGST Act.

4. Supplier avails duty drawback or refund of IGST on such supplies.

List of items on which refund on account of inverted tax structure is not allowed:

S. No.	Tariff item, heading, sub- heading or Chapter	Description of Goods
1	8601	Rail locomotives powered from an external source of electricity or by electric accumulators
2	8602	Other rail locomotives; locomotive tenders; such as Diesel-electric locomotives, Steam locomotives and tenders thereof
3	8603	Self-propelled railway or tramway coaches, vans and trucks, other than those of heading 8604
4	8604	Railway or tramway maintenance or service vehicles, whether or not self-propelled (for example, workshops, cranes, ballast tampers, trackliners, testing coaches and track inspection vehicles)
5	8605	Railway or tramway passenger coaches, not self-propelled; luggage vans, post office coaches and other special purpose railway or tramway coaches, not self-propelled (excluding those of heading 8604)
6	8606	Railway or tramway goods vans and wagons, not self-propelled
7	8607	Parts of railway or tramway locomotives or rolling-stock; such as Bogies, bissel-bogies, axles and wheels, and parts thereof
8	8608	Railway or tramway track fixtures and fittings; mechanical (including electro-mechanical) signalling, safety or traffic control equipment for railways, tramways, roads, inland waterways, parking facilities, port installations or airfields; parts of the foregoing

Maximum Refund Amount= (Turnover of Inverted rated supply of goods and services * Net Input Tax credit/ Adjusted total Turnover)- Tax Payable on such inverted rated supply of goods and services. 

For Example

Information Pertaining to Inward Supplies
Particulars	Value	Rate of GST	GST Amount
Inward supplies utilized for producing manufactured goods.	Rs 40 Lakhs	12%	Rs 4.80 Lakhs
Inward supplies utilized for producing manufactured goods.	Rs 10 Lakhs	18%	Rs 1.80 Lakhs
Total	Rs. 50 Lakhs		Rs 6.60 Lakhs

–

Information Pertaining to Outward Supplies
Particulars	Value	Rate of GST	GST Amount
Turnover of Inverted Rated Supply.	Rs 100 Lakhs	5%	Rs 5 Lakhs
Turnover of Other Supplies.	Rs 20 Lakhs	18%	Rs 3.60 Lakhs
Total	Rs 120 Lakhs		Rs 8.60 Lakhs

• Turnover of Inverted Rated Supply

This refers to the value of inverted supply of goods made by the registered person during the relevant period. Thus, in the above example Turnover of Inverted Rated Supply = Rs 100 Lakhs.

• Net ITC

Net ITC refers to the input tax credit claimed on inputs during the relevant period other than the ITC availed for which refund is already claimed under sub-rule 4A or 4B or both. Thus, in the above example, Net ITC = Rs 4.80 Lakhs + Rs 1.80 Lakhs = Rs 6.60 Lakhs.

• Relevant Period

Relevant Period means the period for which claim has been filed by the registered person.

• Adjusted Total Turnover

Adjusted Total Turnover refers to the aggregate of:

• Turnover in the state or UT as defined under clause 112 of section 2 excluding turnover of services.

Explanation to Rule 89(5) of the CGST Rules, 2017 restricts the benefit of such refund only to the extent of the ‘goods’ procured by the supplier. This means that the refund of input tax paid on ‘services’ cannot be availed.

In the case of VKC Footsteps India Pvt. Ltd. v. UOI the Hon’ble Gujarat High Court held that the above Explanation is ultra vires to the provisions of the Act as the CGST Act categorically provides that refund of ‘unutilized Input tax credit’ and Rules cannot go to disallow a benefit which is granted by the parent legislation.

Contrary to the above decision of the Hon’ble Gujarat High Court, the Hon’ble Madras High Court passed an order in favour of revenue in the case of Tvl. Transtonnelstroy Afcons Joint Venture v. UOI. It was held that the benefit of refund can be availed only to the extent of unutilized ITC that accumulates on ‘goods’, thereby exclusion of unutilized ITC accumulated on ‘services’ in case of inverted rate structure is valid.

The Hon’ble Supreme Court has decided to take up the matter for its final hearing at a later date.

• The turnover of zero-rated supply of services and non-zero-rated supply of services. Here turnover of zero-rated supply of services’ means the value of zero-rated supply of services that are made under Bond or LUT without payment of tax.

Adjusted Total Turnover does not include:

• Value of exempt supplies other than zero-rated supplies
• Turnover of supplies for which refund is claimed under sub-rule 4(A) or 4(B) or both.

Thus, in the example above, Adjusted Total Turnover = Rs 100 Lakhs + Rs 20 Lakhs = Rs 120 Lakhs.

Thus, Maximum Amount of Refund = [(Rs 100 Lakhs) x Rs 6.60 Lakhs/Rs 120 Lakhs] – Rs 5 Lakhs = Rs 0.5 Lakhs

How To Claim Refund of Unutilized ITC?

• File the refund application for unutilized ITC in form GST RFD 01 on the common portal. Post this, the GST portal generates ARN.

FORM-GST-RFD-01

Application for Refund

(Applicable for casual or non-resident taxable person, tax deductor, tax collector, un- registered person and other registered taxable person)

1.	GSTIN / Tem-porary ID
2.	Legal Name
3.	Trade Name, if any
4.	Address
5.	Tax period (if applic-able)	From <Year><Month>			To		<Year><Month>
6.	Amount  of Refund Claimed (Rs.)	Act	Tax	Interest		Penalty		Fees	Oth-ers	Total
		Central tax
		State / UT tax
		Integrated tax
		Cess
		Total
7.	Grounds of refund claim (select from drop down)	(a)	Excess balance in Electronic Cash Ledger
		(b)	Exports of services- with payment of tax
		(c)	Exports of goods / services- without payment of tax (accumulated ITC)
		(d)	On account of order
			Sr. No.	Type of order		Order no.		Order date	Order Iss-uing Auth-ority	Pay-ment ref-erence no., if any
			(i)	Assessment
			(ii)	Provisional assessment
			(iii)	Appeal
			(iv)	Any order (specify)	other
		(e)	ITC accumulated due to inverted tax structure [clause (ii) of first proviso to section 54(3)]
		(f)	On account of supplies made to SEZ unit/ SEZ developer (with payment of tax)
		(g)	On account of supplies made to SEZ unit/ SEZ developer  (without payment of tax)
		(h)	Recipient of deemed export
		(i)	Tax paid on a supply which is not provided, either wholly or partially, and for which invoice has not been issued (tax paid on advance payment)
		(j)	Tax paid on an intra-State supply which is subsequently held to be inter- State supply and vice versa (change of POS)
		(k)	Excess payment of tax, if any
		(l)	Any other (specify)
8.	Details of Bank account	Name of bank	Address of branch	IFSC		Type of acc-ount	Ac-count No.
9.	Whether Self-Declaration filed by Applicant u/s 54(4), if applicable				Yes   No

Take a print out of RFD 01 along with acknowledgement generated on the common portal. Acknowledgement is called RFD-02.

Form RFD-02

Acknowledgment

Your application for refund is hereby acknowledged against <Application Reference Number>

Acknowledgement Number:

Date of Acknowledgement:

GSTIN/ UIN/ Temporary ID, if applicable:

< Applicant’s Name:

Form No.:

Form Description:

Jurisdiction (tick appropriate)  : Centre  State/Union Territory: Filed by

Refund Application Details
Tax Period
Date and time of filing
Reason for refund

Amount of Refund Claimed:

	Tax	Interest	Penalty	Fees	Others	Total
Central Tax
State Tax
UT Tax
Integrated Tax
Cess
Total

Note 1: The status of the application can be viewed by entering ARN through <Refund> Track Application Status” on the GST System Portal.

 Note 2: It is a system generated acknowledgement and does not require any  signature.

• Submit these printed documents together with other supporting documents to proper jurisdictional officer.
• Refund application is processed by the tax official. On processing of the refund application, the refund is provided manually.
• In case of any deficiency by the taxpayer form RFD-03 is issued by the Assessing Officer.

Form GST RFD -03

Deficiency Memo

 

Reference No.:

Date: <DD/MM/YYYY>

To

GSTIN/ UIN/ Temporary ID):

(Name):

(Address):

Subject: Refund Application Reference No. (ARN) …………Dated ………<DD/MM/YYYY>……- Reg.

Sir/Madam,

This has reference to your above-mentioned application filed under section 54 of the Act. Upon scrutiny of your application, certain deficiencies have been noticed below:

Sr No	Description (select the reason from the drop down of the Refund application)
1.	<MULTI SELECT OPTION>
2.	Other <TEXT BOX> {any other reason other than the reason select from the ‘reason master’}

You are advised to file a fresh refund application after rectification of above deficiencies

Date:

Place:

Signature (DSC):

Name of Proper Officer:

Designation:

Office Address:

• When the concerned officer is satisfied with application and documents submitted by the taxpayer, the officer shall make an order in form RFD-06 and issues payment advice in form RFD-05.

Form GST RFD-05

Payment Advice

Payment Advice No: –

Date: <DD/MM/YYYY>

To <Centre> PAO/ Treasury/ RBI/ Bank

Refund Sanction Order No. ……………

Order Date……<DD/MM/YYYY>……….

GSTIN/ UIN/ Temporary ID <> Name: <>

Refund Amount (as per Order):

	Central Tax	State Tax	UT Tax	Integrated Tax	Cess
Net Refund amount sanctioned
Interest on delayed Refund
Total

–

	Details of the Bank
i.	Bank Account no as per application
ii.	Name of the Bank
iii.	Name and Address of the Bank /branch
iv.	IFSC
v.	MICR

Date: Signature (DSC):

Place:

Designation:

To

(GSTIN/ UIN/ Temporary ID):

(Name):

(Address):

Name:

  Office Address:

• After all of the above procedures refund is issued to the tax payer in RFD-06.

Form RFD -06

Order No.:

Date: <DD/MM/YYYY>

To

(GSTIN/ UIN/ Temporary ID)

(Name)

(Address)

Show cause notice No. (If applicable)

Acknowledgement No.

Dated ………<DD/MM/YYYY>

Refund Sanction/Rejection order

Sir/Madam,

This has reference to your above-mentioned application for refund filed under section 54 of the Act*/ interest on refund*.

<< reasons, if any, for granting or rejecting refund >>

Upon examination of your application, the amount of refund sanctioned to you, after adjustment of dues (where applicable) is as follows:

*Strike out whichever is not applicable 

Description

Integrated Tax

Central Tax

State/ UT tax

Cess

T

I

P

F

O

Total

T

I

P

F

O

Total

T

I

P

F

O

Total

T

I

P

F

O

Total

1. Amount of refund/interest* claimed

2. Refund sanctioned on provisional basis (Order No…. date) (if applicable)

3.   Refund      amount      inadmissible <<reason dropdown>> <Multiple reasons to be allowed>

4. Gross amount to be paid (1-2-3)

5.     Amount         adjusted         against outstanding demand (if any) under the existing law or under the Act. Demand Order No…… date……, Act    Period <Multiple rows possible- add row to be given>

6. Net amount to be paid

Note – ‘T’ stands Tax; ‘I’ stands for Interest; ‘P’ stands for Penalty; ‘F’ stands for Fee and ‘O’ stands for Others

*Strike out whichever is not applicable

^&1. I hereby sanction an amount of INR      to M/s                _having GSTIN _   under sub-section (5) of section 54) of the Act/under section 56 of the Act^{@ @}Strike out whichever is not applicable 

(a) ^#and the amount is to be paid to the bank account specified by him in his application;

(b) the amount is to be adjusted towards recovery of arrears as specified at serial number 5 of the Table above;

(c) an amount of —–rupees is to be adjusted towards recovery of arrears as specified at serial number 5 of the Table above and the remaining amount of———————————————————————————————————————- rupees is to

be paid to the bank account specified by him in his application^# . .

^#Strike-out whichever is not applicable.

Or

^&2. I hereby credit an amount of INR _   to Consumer Welfare Fund under sub-section (…) of Section (…) of the Act. .

^&3. I hereby reject an amount of INR      to M/s                  having GSTIN _   under sub-section (…) of Section (…) of the Act.

Strike-out whichever is not applicable 

Date:

Place:

Signature (DSC):

Name:

Designation:

Office Address: