Q.1 What is Inverted Duty Structure in GST?

Ans: The term ‘Inverted Tax Structure‘ refers to a situation where the rate of tax on inputs purchased is more than the rate of tax on outward supplies. That means Inverted Duty Structure arises when tax paid on Inward Supplies is higher than tax payable on outward supplies.

For Example A Ltd is a company which is manufacturing Product X for which the company buys input material @18% GST and paid GST to his Supplier of Rs.500000 and the final product X has GST of 12% and collected from Customer of Rs.150000. In this situation A Ltd is paying more GST on inputs used then the output which is manufactured. This type of transaction is called as Inverted Duty Structure.

3d rendering GST Tax India with rupee sign

Q.2 Can any registered person claim refund?

Ans: As per the provisions of Section 54(3) of CGST Act,2017 refund can be claimed only under specified circumstances:-

a) Zero rated supplies made without payment of tax;

b) 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.

Q.3 Is there any time limit for claiming refund under Inverted Duty Structure?

Ans: Refund claim has to be filed within two years from the end of the financial year in which such claim for refund arises.

Q.4 Is there any form for claiming refund under Section 54?

Ans: Yes, the person claiming refund has to make an application in Form GST RFD-01. The necessary pre-requisite before filing Refund Application form is that all GSTR-1 and GSTR-3B have to be filed of the period for which refund application is sought. The Application is to be made with the Proper Officer of IGST/SGST/CGST exercising jurisdiction over the Claimant.

Q.5 Can I claim refund for GST paid on services and capital goods?

Ans: No, refund is allowed only for GST paid on input goods. Notification no. 26/2018 make changes in Rule 89(5) with retrospective effect from 1st July 2017 and allow refund only for the inputs of goods. Input here excludes input services and capital goods for this purpose. Further this has supported by the recent Supreme Court Judgement in the case of  VKC Footsteps India Pvt. Ltd. v. UOI and Madras High Court Judgment in case of Tvl. Transtonnelstroy Afcons Joint Venture v. UOI.

Q.6 What is considered as an Input for claiming a refund under Inverted Duty Structure?

Ans: Rule 89(5) of CGST Rules,2017 restricts the benefit of refund only to the extent of the “Goods” procured by the Supplier and utilised in product for Inverted Duty Structure. Hence refund of Input tax on “Services” and “Capital Goods” cannot be availed. Further Supreme Court has recently passed the Judgement in the case of VKC Footsteps India Pvt. Ltd. v. UOI and Madras High Court Judgment in case of Tvl. Transtonnelstroy Afcons Joint Venture v. UOI. 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’ and ‘capital goods’.

Q.7 Is there any Maximum limit for claiming of Refund Amount?

Ans: Yes, as per Rule 89(5) of CGST Rules, 2017 there is a set formula for the purpose of claiming Maximum Refund Amount which is as below:-

Maximum Refund Amount = {(Turnover of inverted rated supply of goods and services) x Net ITC ÷ Adjusted Total Turnover} – tax payable on such inverted rated supply of goods and services.

Explanation- For the purposes of this sub-rule, the expressions:-

a) “Net ITC” shall mean input tax credit availed on inputs (i.e Goods) during the relevant period other than the input tax credit availed for which refund is claimed under sub-rules 4(A) or (4B) or both

b) “Adjusted Total turnover” means the turnover in a State or a Union territory, as defined under sub-section (112) of section 2, excluding the value of exempt supplies other than zero-rated supplies, during the relevant period

The above formula can be understood with an Example

Details of Outward Supplies:-

Particulars Value GST Rate GST(Rs.)
Turnover of Inverted Duty Structure 500 Lakhs 5% 25 Lakhs
Turnover of other Supply taxed @28% 700 Lakhs 28% 196 Lakhs
Total ITC 1200 Lakhs   221 Lakhs

Details of Inward Supplies:-

Particulars Value GST Rate GST (Rs.)
Inward of Goods @5% 100 Lakhs 12% 12 Lakhs
Inward of [email protected]% 200 Lakhs 28% 56 Lakhs
Inward of Services @18% 100 Lakhs 18% 18 Lakhs
Inward of Capital [email protected]% 50Lakhs 28% 14 Lakhs
Total ITC 450 Lakhs   100  khs

In the above Input Tax Credit shall be only taken on Goods i.e Rs.68 Lakhs (12 Lakhs + 56 Lakhs) and ITC on Capital Goods and Services shall not be considered. Inverted Turnover shall be Rs. 500 Lakhs and Adjusted Turnover shall be Rs. 1200 Lakhs. Thus the maximum refund shall be Rs. 28.33 Lakhs (500 Lakhs/1200 Lakhs * 68 Lakhs).

Q.8 Can Refund Application be made in case Inputs and Output supplies are same?

Ans: As per Recent Judgement ofGauhati High court in case of BMG Informatics Pvt Ltd v/s Union of India it was held that Refund under Inverted Duty Structure is allowed even if input supplies and output supplies are same. However Circular No.135/05/2020-GST dated 31.03.2020 restricts refund of Inverted Duty Structure in case of situation where Inputs and Outputs Supplies are same.

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Qualification: CA in Practice
Company: Suyash Tripathi & Co. Chartered Accountants
Location: MUMBAI, Maharashtra, IN
Member Since: 18 May 2020 | Total Posts: 13

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