Notification No. 05/2017 – CGST (Rate) dated 28th June 2017 restricted the refund of input tax credit in respect of inverted rate structure (i.e. rate of tax on inputs being higher than rate of tax on output) in respect of certain goods. Notification 20/2018 – CGST (Rate) was issued on 26th July g2018 to amend the above notification and enable refund in respect of specified goods textile sector (refer the notification for the list) under inverted rate structure w.e.f. 1st August 2018.
There were numerous questions being raised on the Notification 20/2018 – CGST (Rate) which have been clarified by Circular No. 56/30/208 – CGST. In this article, I have tried to bring out the essence of the circular in its simplest form.
The moot question, that the notification was beyond the scope of Section 54 and was illegal, has been taken at toss. It is clarified that the legislative power to lapse the input tax credit flows inherently from the power to deny the refund of accumulated ITC on account of inverted rate structure.
Another important question was whether the following shall also lapse
- The accumulated ITC on account of input services and capital goods;
- ITC on closing stock of inputs as on 31st July 2018
- ITC on inputs lying in closing stock of finished goods and stock in progress as on 31st July 2018
It is clarified that such ITC shall not lapse. The formula for reversal takes care of this (refer the steps below)
Further the balance if any left after such reversal shall not be eligible refund but can be adjusted against future liabilities.
Given below are the steps to be followed for calculation of ITC which need to be reversed:
| STEP 1 | Calculate Net ITC taken during the period July 2017 – July 2018 (CGST, SGST & IGST separately) |
| STEP 2 | Calculate ITC on inputs in closing stock (inputs, stock in progress, finished goods) as on 31st July 2018. |
| STEP 3 | Net ITC which is subject matter of reversal = Step 1 (less) Step 2 |
| STEP 4 | Maximum Reversal = (Turnover of inverted rated supply of goods/Adjusted total Turnover) * Net ITC – Tax Payable on such inverted rated supply of goods
Meaning of Adjusted total turnover is provided in Rule 89(5) |
| STEP 5 | Closing ITC (after payment of July dues) > Step 4, ITC reversal = Step 4
Closing ITC (after payment of July dues) < Step 4, ITC reversal = Closing ITC |
Given below are the documentation formalities to be followed:
- File the details of Closing stock (Step 2 above) in table (7) of GST ITC 01 on the GST portal.
- The amount as calculated in Step 5 shall be shown as reversal in column 4B (2) of GSTR 3B
- Prepare detailed workings of reversal, could be verified by officer during the filing of refund claim from August 2018.
Illustration:
Facts:
| Normal Turnover | Turnover under inverted rate | Adjusted Turnover | Tax on Inverted rate on output | Net ITC on inputs for the period | Closing ITC |
| (a) | (b) | (c) | (d) | (e) | (f) |
| 1,50,000 | 4,50,000 | 6,00,000 | 22,500 | 30,000 | 18,000 |
| 1,50,000 | 4,50,000 | 6,00,000 | 22,500 | 80,000 | – |
| – | 6,00,000 | 6,00,000 | 30,000 | 55,000 | 13,000 |
| 6,00,000 | – | 6,00,000 | – | 30,000 | 48,000 |
| 2,00,000 | 4,00,000 | 6,00,000 | 20,000 | 45,000 | 25,000 |
Steps
| Step 1 | Step 2 | Step 3 | Step 4 | Step 5 |
| Column (e) | Physical Stock | Step 1- Step2 | {(Step 3)*(b)/(c)} – (d) | Reversal Amount |
| 30,000 | 5,000 | 25,000 | – | – |
| 80,000 | 5,000 | 75,000 | 33,750 | – |
| 55,000 | 5,000 | 50,000 | 20,000 | 13,000 |
| 30,000 | 5,000 | 25,000 | – | – |
| 45,000 | 5,000 | 40,000 | 6,667 | 6,667 |
Disclaimer: The above information is for educational purpose, kindly take professional advice before any action.
The author is a Chartered Accountant in Chennai and can be reached at pragyasingh146@gmail.com
Author Bio
Net ITC used in calcuating Step 4 i.e. Maximum Reversal is as per Step 1 i.e. Net ITC on inputs for the period, however Net ITC in calculationg Step 4 should be as per Step 3 i.e. Net ITC on inputs for the period (-)minus ITC on inputs lying in stock as it is specifically written in S. No. 11 of Circular 56/30/2018-GST that the ITC involved in inputs contained in Stock lying in balance as on 31/07/2018 may be excluded for determination of Net ITC for the purpose of applying the said formula.
So in the fifth example Maximum reversal should be calculated as follow:
(40000*400000/600000) – 20000 = 6666.67.