Inverted Duty Structure and Refund criteria under GST Law

Introduction

The word “inverted tax structure” means a situation where tax rate applied to the inputs used in a process or production is higher than the tax rate imposed on the final outputs intended for sale. In simple terms Inverted Duty Structure arises when tax paid on Inward Supplies is more than tax payable on outward supplies. This scenario can create challenges and imbalances in the tax system, potentially leading to complications in pricing to the taxpayers. Hence taxpayers are in dilemma if this situation faces by them. Therefore GST law provide relaxation to such taxpayers who fall under inverted duty structure by giving back the Refunds under GST to the some extent.

Section 54(3) of CGST Act, 2017

Section 54 of CGST deals with Refunds under GST in various scenarios.

Sec 54(3) of CGST Act, 2017 states:

Subject to the provisions of sub-section (10), a registered person may claim refund of any unutilized input tax credit at the end of any tax period:

• Zero rated supplies made without payment of tax;
• 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

In following illustrative cases where taxpayer may get the Refund under Inverted duty structure scheme under GST:-

• A composite supply wherein the output is at a lower rate than the goods/services forming part of such composite supply.
• Goods exported on payment of IGST under the claim of rebate, wherein the IGST rate is lower than the GST rate applicable.
• Accumulation of ITC due to rate change.
• When the input and output tax rates are the same, but there is accumulation of ITC for any other reasons.
• In case of any supply made to the government or its department where special rate on outputs provided under law. For example when output services or contract provided to the government or its departments as notified under various notifications with lower rate on outputs as compare to the rate on inputs. In this situation taxpayer may get the refund under this scheme.

In following illustrative cases where exceptions provided to the taxpayer where he may not get Refund under Inverted duty structure scheme under GST:-

• Output supplies are nil rated or fully exempt supplies except for supplies of goods or services or both as may be notified by the Government on the recommendations of the GST Council.
• When supplier avails duty drawback or refund of IGST on such supplies.
• When goods exported out of India are subject to export duty.
• In case of construction services as per Notification 15/17-CT(Rate) 28.06.2017

Calculation of maximum amount of Refund eligible in case of Inverted Duty Structure as per Rule 89(5)

Rule 89(5) specifies that in the case of refund on account of inverted duty structure, maximum refund of ITC shall be calculated as per the formula prescribed below:-

Explanation of some Terms of Formula:

1. Net Input tax credit (ITC):

Net ITC means ITC availed on inputs during the relevant period other than the ITC availed for which refund is claimed under sub-rules (4A) or (4B) or both and 9.

(It is hereby clear that net ITC include the credit related to the Inputs only. Neither include Credit on capital goods nor on Input services that means this rules prevent refund of tax paid on input services and Capital goods as part of refund of ITC accumulated on account of inverted duty structure.)

2.  Adjusted Total Turnover:

It’s calculated by adding:

(a) The turnover in a State or Union territory, excluding the turnover of services, as defined under section 2(112)

(b)  The turnover of Zero-rated supply of services, which means the value of Zero-rated supply of services made without payment of tax under bond or LUT, calculated in the following way:

Zero-rated supply of services is calculated by adding up payments received during the relevant period for such services.

This value also includes completed services where payment was received in advance before the relevant period. However, exclude those advances received for services that haven’t been completed during the relevant period.

Following Turnover/supplies have been excluded while calculating the Adjusted Total Turnover:-

(a) The value of exempt supplies other than zero-rated supplies.

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

3. Relevant Period:

It means period for which the Refund claim has been filed.

Examples in order to understand the calculation of Maximum amount of refund as per above mentioned formula

Example 1:-

DEF Company produces goods, namely Product X, which falls under the 12% GST rate category. In Manufacturing Process Company use the raw material A with 5% GST and raw material B with 18% GST. Here excludes Input Services and Capital Goods.

Assuming the company exclusively manufacture and sells Product X during the relevant period, the adjusted total turnover equals the total sales value of Product X. Suppose the company sells Product X with a value of 5,000/. For this production, the company procures raw material A Rs.1000/- and B with value of 2000/- for manufacturing Product X.

The Net ITC is calculated as 410/- (50/- for raw material A and 360/- for raw material B).

Maximum Refund Amount = 3000*410

——————— [3000*12%*410]

3000  ———

410

Hence the maximum refund amount is Rs. 50/-.

Example 2:-

XYZ supplier is engaged in supply of taxable goods. Given below are the details of the turnover and applicable GST rates of the final products manufactured by company. Input tax credit (ITC) availed on inputs used in manufacture of each of the final products and GST rates applicable on the same, during a relevant Tax period:

It has also been provided that Product B is notified as a product, in respect of which no refund of unutilized Input tax credit shall be allowed under said section.

Tax payable on inverted rated supply of Product A = 6,00,000 × 5% = 30,000/-.

Net ITC = 102000 (54,000 + 48,000) [Net ITC availed during the relevant period needs to be considered irrespective of whether the ITC pertains to inputs eligible for refund of inverted rated supply of goods or not].

Adjusted Total Turnover = 11,00,000 (6,00,000 + 5,00,000)

Turnover of inverted rated supply of Product A = 6,00,000

Maximum refund amount for XYZ ltd is as follows:

= [(6,00,000 × 102000)/ 11,00,000] – (30,000 x 102,000/102,000)

= 25,636

Whether inversion created due to change in rate of GST on same goods is eligible for refund under inverted duty structure?

It has been clarified that situations created where the GST rate on certain goods changes by GST department via Council Recommendations, leading to an inverted duty structure, the applicant may not be eligible to seek a refund of unutilized Input tax credit (ITC) under this section. For example, if an applicant initially purchases goods “A” with an 18% GST rate, and later the rate is reduced to12%, such situations are not covered under section 54(3)(ii).

When the inversion is created due to lesser rate on output than input due to concessional notification on output issued by the GST Department?

It has been clarified by Circular No.135/05/2020-GST dated 31.03.2020 as amended by Circular No.173/05/2022 GST dated 06.07.2022. In situations where the rate of tax on the output supply is less than the rate of tax on inputs due to a concessional notification, taxpayers can be eligible for a refund of accumulated Input tax credit (ITC) under the provisions of clause (ii) of the first proviso to section 54(3). This applies unless the output supply is either Nil rated or fully exempted, and the goods or services supplied are not excluded from the refund of accumulated ITC under the government`s notification. Notably, suppliers who provide goods to merchant exporters at the concessional rate of 0.1% (0.05% CGST and 0.05% SGST/UTGST or 0.1% IGST) under specific notifications are also entitled to a refund on account of an inverted tax structure.