Introduction
“In the realm of Goods and Services Tax (GST), one of the most complex and often misunderstood areas is the Inverted Duty Structure. This arises when the tax rate on inputs (purchases) is higher than the tax rate on outputs (sales). Such a situation disrupts the balance of input-output taxation and leads to the accumulation of Input Tax Credit (ITC). To address this, the GST law provides a mechanism for refund of unutilized ITC, under certain conditions.”
1.Section 54(3) of CGST Act, 2017
Section 54 deals with various refund scenarios. Sub-section (3) specifically permits a registered person to claim a refund of unutilized ITC in the following cases:
1.Zero-rated supplies made without payment of tax.
2. Accumulated credit due to higher tax on inputs than output supplies (excluding nil-rated or exempt supplies), subject to notified exceptions.
“When Refund is Permitted”
- Composite supply where inputs are taxed higher than output.
- Exports where IGST rate is lower than GST on local inputs.
- Accumulated ITC due to tax rate change.
- Government contracts where concessional output tax rates apply.
- Other genuine cases where output rate is lesser than input, causing accumulation.
“When Refund is Not Permissible”
There are specific exceptions to avoid misuse:
- Output supplies are nil-rated or fully exempt (unless specifically notified).
- If the taxpayer has availed duty drawback or IGST refund on exports.
- Goods exported are subject to export duty.
- Construction services covered under Notification 15/2017-CT (Rate) dated 28.06.2017.
2. Refund Formula (Notification No. 14/2022 – CT dated 05.07.2022)
Maximum Refund Amount =
{(Turnover of inverted rated supply of goods) × Net ITC ÷ Adjusted Total Turnover}
– Tax Payable on such inverted rated supply × (Net ITC ÷ Total ITC on Inputs & Input Services)
“Definitions:
- Net ITC: ITC on inputs only (excludes ITC claimed under Rule 89(4A)/(4B)).
- Adjusted Total Turnover: includes taxable turnover + zero-rated supply of services, excluding exempt supplies and turnover for which refund is already claimed.
Note: “Special Rate Change Situations”
1.Not Eligible: If inversion arises due to GST rate reduction on same goods (e.g., from 18% to 12%), refund is not allowed under Section 54(3)(ii).
2. Eligible: If output rate is lowered by a notification (e.g., concessional rate for government contracts or to merchant exporters), refund can be claimed if not nil/exempted and not specifically excluded.
3.Step-by-Step Practical Working for Refund Application
Step 1: Compare GSTR-2B vs GSTR-3B
GSTR-2B = B2B + Debit Note – Credit Note + Import + RCM.
GSTR-3B = Total ITC as reported in Table 4.
Take the Lower ITC value for refund computation.
Step 2: Prepare GST IDS Computation Sheet
Compute the inversion data using invoices.
Step 3: Prepare Annexure B
Details every input invoice (number, date, supplier, GSTIN, HSN, bifurcation).
Ensure total ITC matches the lower of GSTR-2B vs 3B.
Step 4: Prepare GST Refund Utility – Form S01A
Use GSTR-2B and GSTR-1 data with lower output rate.
Step 5: File Refund Application – GST RFD-01
Apply online at the GST Portal.
4.Time Limit to Claim Refund
Normally within 2 years from the relevant date (i.e., due date of return under Section 39).
However,Notification 13/2022-CT dated 05.07.2022 excludes the period 01.03.2020 to 28.02.2022, extending the timeline.
Effectively, refund can be claimed for periods from May 2019 onwards as of May 2023.
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