GST Refund of Inverted Tax Duty in case input and output product is same

In many cases officers are denying refunds of inverted tax structure because main product is of input and output is same but refund is calculated for by products.

For example if Taxpayer is involved in T shirt printing and selling and his main input and output is same which is T shirt.

In this industry after T shirt another main important purchase is of Ink and threads which is at 18%. As per formula of rule 89(5) refund is coming but officials are denying refund because input and output product is same.

We need to consider following things for reply in such cases:

1. Legal Provisions Governing Refund of Accumulated Input Tax Credit

• Section 54(3) of the CGST Act, 2017 specifically provides for refund of accumulated Input Tax Credit (ITC) in cases where the rate of tax on inputs is higher than the rate of tax on output supplies. It reads as follows:

“Where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies, refund of the accumulated ITC shall be allowed subject to such conditions and restrictions as may be prescribed.”

This section clearly intends to provide relief to taxpayers suffering credit accumulation due to the “inverted duty structure.”

• Further, Section 2(59) of the CGST Act, 2017 defines Input as:

“Any goods other than capital goods used or intended to be used by a registered person in the course or furtherance of business.”

2. Applicability of Section 54(3) and Definition of Inputs to Our Case

• As per Section 54(3) of the CGST Act, 2017, refund of accumulated Input Tax Credit (ITC) is permissible when the credit accumulation arises due to the rate of tax on inputs being higher than that on output supplies.
• Importantly, Section 2(59) of the CGST Act defines Inputas “any goods other than capital goods used or intended to be used by a registered person in the course or furtherance of business.”
• In the present case, the refund claim pertains only to inputs (goods) as defined under the Act. We have excluded capital goods and input services from the refund claim in strict compliance with the definition of inputs under Section 2(59).
• Therefore, our refund claim squarely falls within the ambit of Section 54(3) since the accumulated ITC relates exclusively to inputs (goods) on which the input GST rate exceeds the output GST rate.

3. Clarification Issued by CBIC through Circulars

Your notice cites the rates of GST on inputs and outputs and states the refund claim does not fit the “inverted duty structure” category since input and output tax rates are same for certain supplies. We would like to bring to your kind notice the clarifications issued by CBIC, which directly address this issue:

• Circular No. 135/05/2020-GST dated 31.03.2020, Para 3.2 states:

“It may be noted that refund of accumulated ITC in terms clause (ii) of sub-section (3) of section 54 of the CGST Act is available where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies. It is noteworthy that, the input and output being the same in such cases, though attracting different tax rates at different points in time, do not get covered under the provisions of clause (ii) of sub-section (3) of section 54 of the CGST Act. It is hereby clarified that refund of accumulated ITC under clause (ii) of sub-section (3) of section 54 of the CGST Act would not be applicable in cases where the input and the output supplies are the same.”

• Circular No. 173/05/2022-GST dated 06.07.2022 further clarified and substituted Para 3.2 of the above Circular as follows:

“3.2 It may be noted that refund of accumulated ITC in terms of clause (ii) of first proviso to sub-section (3) of section 54 of the CGST Act is available where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies. It is noteworthy that, the input and output being the same in such cases, though attracting different tax rates at different points in time, do not get covered under the provisions of clause (ii) of the first proviso to sub-section (3) of section 54 of the CGST Act.

3.3 There may however, be cases where though inputs and output goods are same but the output supplies are made under a concessional notification due to which the rate of tax on output supplies is less than the rate of tax on inputs. In such cases, as the rate of tax of output supply is less than the rate of tax on inputs at the same point of time due to supply of goods by the supplier under such concessional notification, the credit accumulated on account of the same is admissible for refund under the provisions of clause (ii) of the first proviso to sub-section (3) of section 54 of the CGST Act, other than the cases where output supply is either Nil rated or fully exempted, and also provided that supply of such goods or services are not notified by the Government for their exclusion from refund of accumulated ITC under the said clause.”

This clarification makes it explicit that refund cannot be denied merely because input and output are the same goods if the output supplies are made under concessional notifications resulting in lower GST rates on outputs than inputs at the same time.