The inverted tax structure refers to a situation where the rate of tax on inputs is higher than the rate of tax on output supplies. This imbalance can lead to the accumulation of Input Tax Credit (ITC) and cause financial losses to businesses. To address this issue, the provisions of Section 54 of the CGST Act, 2017, along with Rule 89(5) of the CGST Rules, 2017, allow for the refund of accumulated ITC on account of the inverted tax structure. This refund is commonly known as the Inverted Tax Structure Refund.
Inverted Tax Structure
As per the Provisions of Section 54 of CGST Act, 2017 read with Rule 89(5) of CGST Rules, 2017,
Where the Input Tax Credit (ITC) has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies. (Other than nil rated and wholly exempt supplies).
In simple words refund when,
GST Rate on outward supplies < GST Rate on Inputs used for such supplies
Refund of Input services and Capital Goods is not a part of refund of accumulated ITC on account of inverted tax structure.
Commonly called as Inverted Tax Structure Refund.
In this case, registered person become eligible for refund as per predefined formula discussed below.
No refund of Unutilised ITC on account of Inverted Tax Structure for notified supplies
Government on recommendation of the council, notifies the following supplies where no refund of Unutilised ITC on account of Inverted Tax Structure.
- Supply of Constuction of complex or building intended for sale as specified in para 5(b) of Schedule II of CGST Act
- Woven fabrics of Silk/wool/cotton
- Rail locomotives and Rail coaches/ vehicles
However, this restriction will not be applicable to refund for zero rated supplies under rule 89(4) of CGST Act, i.e.
- Exports of goods or services or both: or
- Supply of goods or services or both to SEZ developer or unit
Time limit within which refund claim can be filed under rule 89(5)
Application for refund before the expiry of 2 years from due date of furnishing of return u/s 39 i.e GSTR-3B for the period in which such claim for refund arises.
Refund Calculation under Inverted Tax Structure
Maximum Refund Amount
〈Turnover of Inverted rated supply of Goods & services/Adjusted Total Turnover*Net ITC〉 − 〈Tax payable on such inverted rated supply of goods and services/ITC availed on inputs and input services*Net ITC〉
Net ITC: – ITC on Inputs during the relevant period other than ITC for which refund claimed under
- Rule 89(4A) i.e. Deemed Export
- Rule 89(4B) i.e. Merchant Export (Penultimate Supply)
Net ITC covers the ITC availed on all inputs in the relevant period, irrespective of their rate of tax (i.e. ITC of GST paid on those inputs which are procured at equal or lower rate of GST than the rate of GST on outward supply also included in net ITC for refund under Inverted tax structure).
Adjusted Total Turnover includes: –
- Adjusted Total Turnover includes: –
- Turnover of Zero-rated supply of services i.e. export of services, calculated as: –
- Payment Received during the period for zero rate supply of services (ZRSS)
- +
- ZRSS where supply has been completed for which payment had been received in advance in any prior period to relevant period
- –
- Advances received for ZRSS during relevant period but supply not been completed
Adjusted Total Turnover Excludes: –
Turnover of supply of goods or services, refund for which has been claimed under rule 89(4A) or 89(4B)
Let us Take an example for better understanding
AKM & co, registered under GST, engaged in weaving yarn into fabric, following information: –
| Nature of Supplies (Intra State) | Value of Supply (excluding GST) |
| Outward supply of fabrics (Tax CGST = 2.5% & SGST = 2.5%) | 30,00,000 |
| Inward Supply of Rayon yarn (Tax CGST = 6% & SGST = 6%) | 24,00,000 |
| Inward supply of services for processing yarn (Tax CGST = 2.5% & SGST = 2.5%) | 4,00,000 |
| Inward Supply of Machine for weaving the processed yarn into fabrics (tax CGST = 9% & SGST = 9%) | 45,00,000 |
In this case,
Net ITC: – 2400000*12% = 288000
Adjusted Total Turnover: – 30,00,000
Tax payable on such inverted rated supply of goods and services: – 30,00,000*5% = 150000
ITC availed on inputs and input services: – (24,00,000*12%)+(4,00,000*5%) = 3,08,000
Turnover of Inverted rated supply of Goods & services: – 30,00,000
Maximum Refund Amount = (2,88,000* 30,00,000/30,00,000) – (1,50,000*2,88,000/3,08,000)
=2,88,000-1,40,260
=1,47,740
Thus, Maximum refund amount is Rs. 1,47,740 each for CGST and SGST.
Note: – Refund of Input services and Capital Goods is not a part of refund of accumulated ITC on account of inverted tax structure.
Conclusion: The provision for the refund of accumulated ITC on account of the inverted tax structure is a crucial aspect of the GST system. It helps businesses recover the excess tax paid on inputs and ensures fairness in taxation. By following the guidelines and applying for the refund within the specified time limit, businesses can avail themselves of the benefits and address the financial challenges caused by the inverted tax structure. It is important for taxpayers to understand the calculation methodology and keep track of their turnover, ITC, and tax liabilities to maximize their eligible refund amount.
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