Refund Under Inverted Rate Structure

The following persons specified in Section 54(3) of the CGST Act, 2017 are eligible to claim GST refund of balance in Electronic credit ledger.-

(i) Export of goods/services:with LUT or supply of goods/services to an SEZ unit/SEZ developer).

(ii) Outward supplies under Inverted Rate Structure.

What is inverted rate structure?

The Act does not define anything like “inverted rate structure”. This is generally used to refer to Section 54(3)(ii) of the MGST Act, the wordings of which are reiterated as under:

“(ii) 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:“

The wordings specify that as the rate of tax on inputs is higher than the rate of tax on output supplies, credit gets accumulated in the electronic credit ledger which is granted as GST refund to the taxable person. The wordings also specify that NIL rated and exempt outward supplies would not be granted refund under this head. The word ínputs” is defined under section 2(59) of the MGST Act as follows-“ïnput” means any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business. As inputs are goods other than capital goods, hence this type of refund is not to be granted in the case of input services and capital goods (goods which are capitalized in the books of account) i.e. ITC figure for working out the refund would not include ITC on input services and on capital goods.

Consider the below example:

Assuming Rs. 1000 of the above input is processed to produce the above output and sold at Rs. 2000. GST payable on outward supply works out to Rs 100 while ITC on the inputs would be Rs 120 (assuming that the supplier has deposited tax in the govt. treasury and all other conditions pertaining to grant of ITC are satisfied.) The carry forward ITC would be Rs. 20, even though there is a value addition. The tax payer would never be liable to pay GST and his credit would be accumulated if the tax rates remain the same.  Hence the option of refund is granted to such type of taxable persons.

Thus for a person to be eligible for refund of unutilised ITC under inverted rate structure, the following need to be satisfied:

1) The taxable person should be registered under the GST Act.

2) The rate of tax on inputs/input services should be higher than the rate of tax on output supplies.

3) The output supplies should not be NIL rated/exempted .

4) Refund would not be granted on the purchases of input services and capital goods

5) Goods or services as notified by the government shall not be eligible for refund.-Notification No. 5/2017 – MGST (Rate) dated 28.06.2017 and Notification No. 15/2017 MGST (Rate) dated 28.06.2017 have been issued. The goods or services (refer the notification for the list) as specified in these notifications shall not be eligible for refund of unutilised ITC under Section 54(3)(ii).

Recently, Notification No. 20/2018 – MGST (Rate) dated 26.07.2018 was issued to make amendment to Notification No. 5/2017 – MGST (Rate) and allow certain specified goods of textile sector to be eligible for grant of refund from 1st August 2018(which were barred earlier under this head).The taxable persons dealing in the textiles covered by notification no 20/2018 shall be eligible for refund on account of the credit accumulated due to inverted rate structure for purchases from 1st August 2018. The credit accumulated on account of inverted tax structure till the 31st July 2018 will lapse after the adjustment of the taxes payable for the July 2018 return. (Please see the CBIC Circular No. 56/30/2018 dated 24th August 2018).

6)The taxable person has to submit all returns for the relevant period and then submit an application on the GST portal after debiting his credit ledger by an amount equal to the refund amount. The relevant period could be a single tax period or many tax periods taken together but the period taken should not spill into different financial years. e.g. If the periodicity of returns is monthly, the taxable person could file single application for the period from November 17 to March 18 but he cannot file single application for the period from January 18 to May 18.He has to file 2 applications in this case i.e. one application for the period from January 18 to March 18 and another application from April 18 to May 18.The application along with the prescribed documents has to be submitted to the GST office.

What is Amount of refund that can be claimed?

Rule 89 (5) of the CGST Rules, 2017 provides a formulae for calculation of the maximum amount of refund that can be claimed as refund. This formula has got revised twice within a year of GST implementation.

Until 18.04.2018, the formula did not allow refund in cases of output supply of services, only supply of goods was eligible. This restriction in the formula appeared irrational as the Act did not restrict service providers from claim of refund and Rules could not override an Act. The earlier formula was as under:-

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

The above formula got modified to include the output supply of services by Notification No. 21/2018 – MGST dated 18.04.2018 to include the value of outward supply of services:

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.

After the issue of the above notification a question arose as to whether the service providers will not be eligible for refund of GST paid on inputs prior to 18.04.2018. Hence Notification No. 26/2018 – MGST dated 13.06.2018 was issued to give the above amendment a retrospective effect from 01.07.2017.Hence, the amended formula is from 01.07.2017.

Let us understand the working with an example .Mr A is registered taxable person in Mumbai. He is reseller as well as manufacturer (manufactured goods are pertaining to inverted rate structure). Purchases of 12% tax rate are used for the manufacture of 5% tax rate goods while purchases of 18% tax rate are resold. The turnover of inverted rate supply of goods during the month of August 18 is Rs 3 crores (taxable at 5%) while adjusted total turnover is Rs 5 crores(Balance Rs 2 crores are taxable at 18%).Total output tax is Rs 51 lakhs (300*5% +200*18%).Net ITC on inputs is Rs 51 lakhs(2 crores taxable at the rate of 12% and 1.5 crores taxable at the rate of 18%).Tax payable on inverted rate outward supply of goods is Rs 15 lakhs (300*5%)..The refund due to inverted duty structure as per the above formula works out to Rs 15.6 lakhs ((300*51/500)-15)

An important aspect in the formula is the definition of “Net ITC” and “Adjusted total turnover”.

1. Net ITC shall mean 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

i.e. ITC of inputs less ITC of inputs on which supplier has claimed benefit of Notification 48/2017 – MGST or Notification 40/2017 – MGST (Rate) or Notification 41/2017-IGST (Rate) or Notification 78/2017- Customs.

2. Adjusted Total Turnover means the sum total of the value of- (a) the turnover in a State or a 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 as mentioned below 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.‘

Turnover of zero rated supply of services is the aggregate of the payments received during the relevant period for zero rated supply of services and zero rated supply of services where supply has been completed for which payment had been received in advance in any period prior to the relevant period reduced by advances received for zero rated supply of services for which the supply of services has not been completed during the relevant period.(This has been amended recently)

The Concern of the service sector regarding inverted duty structure:

Some of the services have inverted duty structure .Even after the retrospective amendment from 1-07-2017 as pointed out earlier, service sector feels that there appears to be no great benefit to service providers as refund of only GST paid on inputs is available even after the amendment.(net ITC figure is pertaining to only inputs).They point out that the major inward supply in most service sectors is input services only and that net ITC figure should include the figure of ITC on input services. .

What is the fate of ITC on input service and capital goods?

The main question asked by many is whether ITC on capital goods and input service could be availed by the taxable person. It needs to be emphasized that the bar is only on the claim of refund on input services and capital goods. The ITC on input services and capital goods could be lawfully availed and used for payment of GST on any other supplies made by the tax payer.

What is the procedure for the claim of refund?

The detailed procedure for manual processing of refund application for inverted duty structure is provided in Circular No. 24/24/2017-GST dated 21st December 2017. The procedure in quick bites is as under:

1. File GSTR 1 and GSTR 3B on the portal

2. File GST RFD – 01A on the portal

3. The amount claimed as determined as per formula will get debited in the electronic credit ledger

4. The application GST RFD – 01A shall be submitted to the office of the  Concerned Joint Commissioner of State Tax in case of persons under Maharashtra state jurisdiction and jurisdictional officer in case of persons under Centre and other state jurisdiction along with documentary evidence as provided in Rule 89(2)(h) .i.e. A statement containing the number and the date of the invoices received and issued during a tax period.

Food for Thought:

1. Consider a manufacturing unit. It may have principal inputs A, B, C and multiple sundry inputs. It may be possible that only some of the inputs may have rate of tax higher than the output supplies and some of the inputs may have rate of tax lower than or equal to the output supplies. The traceability of the balance in ITC balance lying unutilised to the inputs is a nightmare.The term output supplies has not been defined in the Act.Could it be taken same as “outward supplies” as defined in Section 2(83)?

“Outward supply” in relation to a taxable person, means supply of goods or services or both, whether by sale, transfer, barter, exchange, licence, rental, lease or disposal or any other mode, made or agreed to be made by such person in the course or furtherance of business.

I sincerely hope that I have been able to demystify this topic of refund due to inverted rate structure.You could always mail your doubts to [email protected].