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Goods and Service Tax is one of the important ways of collecting revenue from the public, which plays an important role in the collection of funds and its allocation or distribution among various states along with the Union.

As you are well aware that GST is being levied on various goods and services and it is collected on a percentage basis on the value of goods and services. But now the basic question is how such funds are being allocated to various states along with union. The answer to the question is, that the fund is being appropriated on the basis of consumption of the related goods and services, which means that the state to whom half tax will be distributed will be the state in which such goods are being consumed and half will distribute to union (as there only one). The reason behind choosing consumption as the basis for allocation is simply because consumption indirectly implies population. This means where consumption is more, there will be more population, where the population is more there will be more requirements of resources and due to such requirement of resources, there will be more requirement of funds to deploy those resources.

Since GST is a consumption-based tax, Tax finds its ultimate destination on its consumption and at the same time right to claim such tax arises by the respective state in which such supplies are being consumed.

Basic concept of Allocation of fund under GST and refund in case of Inverted structures

So, if we talk about when the government has its proper right to use the funds is when such goods are consumed and deemed to be consumed as per law. It simply means that unless the supplies find their ultimate consumption, a portion of tax revolves along states through the transfer of ITC and ultimately gets settled when such supplies find their consumption.

Now taking to the topic, if any ITC has been taken on goods or services and final consumption relates to goods that are taxed at a lower rate means that difference between ITC and Output tax will be an amount on which none of the government has the right to use is as final tax which is to be paid is only lower rate.

And hence in the case of an Inverted duty structure government allows a refund of Differential Tax, but if we talk about the difference arising on part of ITC of services such tax will never be consumed unless the taxpayer chooses to supply a higher tax rate item or raises a fake invoice to transfer the credit to another supplier. Since a large amount of tax is being stuck in between as ITC on part services and burden of such tax is being born by an ultimate supplier who supplies goods to the consumer. Such a portion of tax should be refunded to such a supplier.

GST refund in case of Inverted structures

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April 2024