Decoding of refund on account of inverted duty structure in GST

Inverted Duty Structure means a situation where in the tax rate on inputs is higher than tax rates on outward supplies. Thus where taxes paid on inputs are at a rate higher than the taxes paid on outward supplies, such situation is an Inward Duty Structure. Inverted duty structure generally results in accumulation of excess taxes credit and thus, need of refund arises.

I. Introduction:

Under Goods and Services Tax Act, 2017, goods and services are classified mainly under five tax slabs: 0%, 5%, 12%, 18% and 28%. Normally, there should always be a liability to pay GST due to value addition made by the taxable person. However, due to multiple tax rates, despite value addition, there might arise a situation that there is accumulation of input tax credit wherein GST rate on inputs is higher than the GST rate on outputs which is termed as Inverted Duty Structure. In the wake of this, the need of refund of unutilized accumulated Input tax credit (ITC) arises. Some of the Industries are falling under Inverted Duty Structure and eligible for Refund of accumulated balance of Input tax credit. Examples of few such industries are:

Sr. No.	Industry	Input Description	Input GST Rate	Output Description	Output GST Rate
1.	E Rickshaw	MS  Pipe,  Sheet Battery, Electricals	18% 28%	E Rickshaw	12%
2.	Non-Woven Fabric Bags	Non-Woven Fabric	12%	Fabric Bags	5%
3.	Utensils	SS Patti/Patti	18%	Utensils	12%

II. Legal background:

√ Sub-section (3) of section 54, of CGST Act, 2017 provides for Refund of Unutilized ITC accumulated on account of inverted duty tax structure. This does not applies to the cases where output supplies are Nil rated or fully exempt. 

√  Sub-rule (5) of Rule 89, of the CGST Rules, 2017 provides for Maximum eligible refund amount for Inverted duty structure.

-‘G&S’ means Goods & Services above.

-‘Net ITC’ means Input Tax Credit availed on inputs during the relevant period other than the input tax credit availed for which refund is claimed under sub-rules (4A) or (4B) or both;

-‘Adjusted Total Turnover’ means the sum total of the value of-

(a) the turnover in a State or 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-

(i) the value of exempt supplies other than zero-rated supplies; and

(ii) the turnover of supplies in respect of which refund is claimed under sub-rule (4A) or sub-rule (4B) or both, if any, during the relevant period.

-‘Tax Payable on such inverted rated supply of goods’ means tax payable on such inverted rated supply of goods under the same head, i.e., IGST, CGST, SGST (Not defined anywhere in the Act or the Rules, however, same is mentioned in the User Manual on GST Portal for filling Refund Application).

-‘Relevant Period’ means the period for which the refund claim has been filed.

III. Procedure for application, processing and sanction of refund – Application to be filed online

The GST policy wing has issued Circular No. 125/44/2019 dated 18.11.2019 and Circular No. 135/05/2020 dated 31.03.2020 by which detailed set of guidelines and processing of refund to be done electronically have been laid down.

♦ Time Period

Application for such refund is to be filed within 2 years from the due date for furnishing of return u/s 39 for the period in which such claim for refund arises.

♦  Form GST RFD-01 and Documents- 

• The application for refund shall be filed online. 
• A comprehensive list of documents to be uploaded with the refund application given in the circular is extracted hereunder:

S. No.	Declarations/Statements/  Undertakings/Certificates to be filled online	Whether required to be separately annexed in RFD-01 or Not (since it is included therein the online form on GST portal by way of check box)
A.	Declaration under second  and third proviso to section  54(3)	Yes
B.	Declaration u/s 54(3)(ii)	(These are not required to be submitted separately as these are already included in RFD-01 and taxpayer need to just fill the required columns or tick the check box provided in Form RFD-01 online)
C.	Undertaking in relation to  sections 16(2)(c) and  section 42(2)
D.	Statement 1 under rule 89(5) & statement 1A under rule 89(2)(h)
E.	Self-declaration under rule 89(2)(l) if amount claimed does not exceed Rs. 2 Lakhs	(Proviso to Rule 89(2)(l)/(m) provides that this declaration or certificate is not required in case of refund under inverted duty structure, hence if demanded by tax authorities on ground of this circular, they can be convinced citing legal provisions.)

Supporting Documents to be additionally uploaded

Copy of GSTR-2A of the relevant period

Statement of Invoices in the format given as Annexure B to Circular No. 125/44/2019 amended vide subsequent Circular No. 135/05/2020.

Self-certified copies of invoices entered in Annexure-B whose details are not found in

GSTR-2A of the relevant period. (However, vide circular no. 135/5/2020, it has been clarified that refund shall be restricted to the ITC of those invoices which are available in GSTR-2A, so this requirement to upload invoices which are not found in 2A, has become redundant but till date this has not been modified/deleted from the circular.)

10 Attachments maximum size of 5 MB may be uploaded with the Refund Application.

Neither the refund application in FORM GST RFD-01 nor any of the supporting documents shall be required to be physically submitted to the office of the jurisdictional proper officer.

Refund application can now be filed by clubbing any tax periods even across the financial years. Earlier, there was restriction regarding bunching of refund claims across financial years (imposed vide circular 125/44/2019) which is challenged in case of Pitambra Books Private Limited v. Union of India, 2020-VIL-45-Delhi, in which the Court held that a Circular cannot impose a substantive restriction which is not coming from the law. Therefore, in light of the Delhi High court decision, vide recent Circular No.135/05/2020 dated 31.03.2020, this restriction has been removed. Though, this change is not yet effective on portal and it will only allow to file refund for tax periods falling within a financial year. 

On filing the refund application, amount of refund shall be automatically debited from the electronic credit ledger of the taxpayer and ARN would be generated. 

♦ Application Reference Number (ARN) and Acknowledgement – 

• The Application Reference Number (ARN) will be generated only after the applicant has completed the process of filing the refund application in FORM GST RFD-01. 
• The application shall be deemed to have been filed on the date of generation of the said ARN and all the time limits regarding issue of acknowledgment (RFD-02) or deficiency memo (RFD-03) or Sanction/rejection order (RFD-06) shall be counted from the date of ARN. 

♦ Deficiency Memos 

• A Deficiency Memo shall be issued within 15 days from the date of generation of ARN. On issuance of deficiency memo, amount of refund applied shall be automatically re-credited to the Electronic Credit Ledger of the taxpayer. 
• A fresh application would be filed after correction/rectification of deficiencies as pointed out and the fresh application shall also have to be submitted within the original time period, as defined in the explanation after sub-section (14) of section 54 of the CGST Act.
• Once an application has been submitted afresh, another deficiency memo with respect to the application for the same period cannot be issued, unless the deficiencies pointed out in the original deficiency memo remain un-rectified, either wholly or partly, or any other substantive deficiency is noticed subsequently.

♦ Refund Sanction/ Rejection order 

• Refund Sanction/ Rejection order (RFD-06) order shall be issued within 60 days from the date of ARN. 
• In case, refund is not credited to the bank account of the applicant within 60 days, interest @ 6 % (notified vide notification No. 13/2017-Central Tax dated 28.06.2017) on the refund amount starting from the date immediately after the expiry of 60 from the date of receipt of application (ARN) till the date of refund of such tax shall have to be paid to the applicant.

IV. Relevant clarifications issued so far- All at one place :-

♦ From Circular No. 125/44/2019 dated 18.11.2019

• Multiple inputs involving multiple GST rates: It has been clarified that for the purpose of refund, ITC accrued on all the inputs used in making supply of outward supply needs to be considered may it be the inputs which are procured at equal or lower rate of GST than the rate of GST on outward supply. For example, multiple inputs such as inputs @ 5% and inputs @ 18% are used for outward supply of which GST rate is 12%. While computing the refund both inputs i.e. rate of 5% and rate of 18% will be considered.
• Refund of accumulated ITC is also applicable on supplies made to merchant exporters at reduced/concessional rate of 0.05% or 0.1%, as the case may be.
• ITC of invoices issued in prior period, “availed” in subsequent period cannot be excluded from the calculation of the refund amount for the subsequent period.
• The refund of ITC on inputs, including inward supplies of stores and spares, packing materials etc., shall be available as long as:

– these are used for the purpose of the business and/or for effecting taxable supplies, including zero-rated supplies &

– ITC for such inputs is not restricted u/s 17(5) of the CGST Act &,

–   these are not capitalized in books of accounts.

• Calculation of refund amount to be claimed – It has been clarified in the circular that the common portal calculates the refundable amount as the least of the following amounts:

a) Maximum refund amount computed in accordance with Rule 89(5) [formula is to applied on consolidated amount of ITC i.e. CGST+ SGST/UTGST+IGST]

b) Balance in electronic credit ledger at the time of filing of refund application

c) Balance in electronic credit ledger at the end of tax period for which refund is being claimed

And the least of the three amounts shall be debited from the electronic credit ledger in the following order –

– IGST, to the extent available

– CGST and SGST equally, and in case of shortfall in balance available in particular ledger (say, CGST), the differential amount shall be debited from other ledger (SGST in this case).

Comment: The anomaly which arises here is that the order of debit described above is not presently available on common portal. Circular mentions that all the three figures shall be compared on consolidated basis i.e. [IGST+CGST+SGST], but the common portal at the time of filing of RFD-01 makes the comparison on Individual (tax-head) basis. The balance in Individual tax heads differs at different point of times and due to this deadlock on common portal, the taxpayers are not able to claim the correct amount of refund for which they are eligible.

♦ From Circular No. 110/29/2019 dated 03.10.2019

• When Nil application is filed inadvertently under this category on common portal, it does not allow to re-file the refund claim for that period under the same category. In such a case, taxpayers may file the refund claim under “Any Other” category and the amount of refund claim shall be separately debited from Electronic Credit Ledger through Form DRC-03, once the application is scrutinized for completeness and eligibility by the proper officer.

♦ From Circular No. 135/05/2020 dated 31.03.2020

• Refund of accumulated ITC on account of reduction in GST Rate: Lately, it has been clarified that the refund of accumulated ITC under inverted duty structure

would not be applicable in cases where the inversion is due to reduction in the GST rate on the same output goods. For example an applicant trading in goods has purchased, say goods “X” attracting 18% GST. However, subsequently, the rate of GST on “X” has been reduced to, say 12%. In this case refund of inverted duty structure shall not be granted.

Comment: Section 54(3)(ii) of the CGST Act allows refund of accumulated ITC on account of GST rate on inputs being higher than GST rate on output. The restriction provided under this circular that inverted tax refund will not be available in case of reduction in rate of GST, is not backed by any provision and seems invalid.

V. Anomalies still existing- All is not well !! 

• No refund of ITC on Input Services – The law under Rule 89(5), as amended & existing today provides the definition of term ‘Net ITC’ to include ITC on inputs only thus, excluding refund of ITC on services from the scope of refund. The anomaly lies in the scope of Act and the procedures carved out in the rules. Challenging the vires of Rule 89(5), no. of writ petitions have been filed in various high courts. It will be interesting to see whether courts will provide relief for the same or the witty GST council would take cognizance of the matter and resolve the same.
• No refund of Transitional Credits –. It is clarified in the circular that transitional credit cannot be treated as part of ‘Net ITC’ as prescribed in rule 89(5) and thus no refund of such unutilized transitional credit is admissible. 

Comment: Both the points above leads to accumulation of ITC to the account of taxpayer which cannot be refunded & just be utilized against tax accruing on outward supply. Thus, taxpayers having multiple businesses wherein more than one goods and services are involved will be benefitted in comparison to the taxpayers having only sole business of the goods falling in ‘inverted duty structure’, the ITC of which has been accumulated will get blocked since refund cannot be availed. 

• Calculation of refund amount is disputed in case of Multi products Businesses –The formula prescribed for calculation of refund provides for definition of Adjusted total turnover as the sum total of turnover in state excluding the exempt supplies and further, the Net ITC is defined as ITC availed on inputs during the relevant period. The interpretation of this rule that is generally taken by the authorities is that Adjusted total turnover shall include turnover of ALL the products in a state and consequently Net ITC shall also include ITC availed on all inputs relating to all products, even in case the multiple products’ chains are wholly independent and no common ITC is arising on account of inputs used in manufacturing of those products.

Comment: In such a situation, the anomaly arises here that the calculation of maximum amount of eligible refund gets tampered and will include the impact of position of stock of the other products where there is no inversion of rate of tax but included in the computation of refund due to bare interpretation of the language of the law provided in Rule 89(5). The law & the circulars issued so far also lacks clarity that whether the turnover and Net ITC as required in the formula will be taken GSTIN wise or product wise.

Refund of Invoices not allowed where they are not populated in GSTR-2A – Earlier, it was clarified that an applicant can claim refund of ITC even on invoices which are not reflected in Form GSTR-2A subject to satisfaction of Rule 36(4) of the CGST Rules i.e. 110% of matched ITC. But the recent clarification issued in Circular 135/05/2020 has modified the earlier one and restricted refund claim of ITC only to the extent appearing in Form GSTR-2A.

Comment: This recent clarification seems incorrect since it bars refund of ITC on unmatched invoices even though Rule 36(4) of the CGST Rules allows ITC on the same to the extent of 10%. Once law allows ITC, refund of such ITC cannot be restricted.

Further, there can be multiple reasons for non-population of Invoices in GSTR-2A, such as error on the part of supplier of applicant to upload invoice on other GSTIN instead of applicant. Before this clarification, the applicant used to claim refund of ITC by uploading the copy of Invoices which are not available in GSTR-2A due to any reasons, but now the applicants have to wait for a month for his supplier to amend the invoices and this again results in working capital blockage.

• New requirement to mention HSN / SAC- It has clarified that the applicant will be required to mention HSN / SAC code of inward supplies along with already prescribed details in Annexure-B of Circular 125/44/2019 to claim refund of ITC. This requirement has been added to distinguish ITC on capital goods and input services vis-à-vis inputs and where the supplier is not mandated to mention HSN / SAC code on invoices, the applicant has been allowed to not mention HSN / SAC code for such invoices.

Comment: This requirement is cumbersome and will create practical difficulties for the taxpayers since maintaining separate record for HSN/SAC codes of all Inward supplies is not required by law anywhere else and it will be difficult to provide at the time of filing refund.

• Sword of Lapsing & reversal of ITC: Further, by virtue of Notification No. 5/2017-Central Tax (Rate) amended vide Notification No. 20/2018- Central Tax (Rate), certain industries have been asked for reversal of accumulated ITC lying unutilized in balance, after payment of tax for and upto the month of July 2018. For reference in case of Narrow Woven fabrics.

Comment: In case of Shabnam Petrofils (P.) Ltd. v. Union of India [[2019] 108 taxmann.com 15 (Gujarat)], it has been held that the notifications and circulars prescribing for lapsing of ITC were to be quashed and declared as ultra vires and beyond scope of section 54(3)(ii). Thus, this newly imposed provision is hard to bear & has invited a lot of litigations.

VI. Conclusion

Post-GST, many industries which were suffering ‘inverted duty structure’ were happy to cherish that they have right to take input credit and, accordingly, claim refund as the same will now not result to be part of cost unnecessarily. It appeared to streamline the fallacies and differential treatment between the goods and services as the same were governed by different laws and with different priorities. The simplification measures through circulars have brought in a fresh air of relief to the trade. However, still there is a long way ahead in the architecture and delivery of refund of accumulated ITC under inverted duty structure. Even after infusion of slew of clarifications by way of the circular time & again, still, there is need to have a re-look at the provisions & the perceptions. Sometimes, it becomes a herculean task to determine and calculate the correct amount of eligible refund. Procedural issues like mentioned above are again forcing the taxpayers to operate from separate entities. Thus, it is right time in promoting clarity and equality in tax administration, input services should also be made eligible for refund of accumulated ITC under inverted duty structure, law should be made clear regarding taxpayers operating in multi products and procedural issues should be removed to make refunds under inverted duty structure as it was envisioned. Hope, these issues will be addressed in due course.