The recent Notification by allowing Refund of Accumulated Credit to Fabric Manufacturer brought some relief, but Textile Industry is not happy as still some other issues are not very clear and are in their favour.

In this Article let us Discuss the back ground of the issue with conceptual clarity.

Let us first discuss what is Inverted Tax Structure and Justification for Refund of Accumulated Input Tax Credit

What is Inverted Tax Structure? :

Inverted Duty Structure means a situation where the tax rate on inputs is higher than tax rates on outward supplies. This results in accumulation of Input Tax Credit as the Credit available is more than the Tax Liability payable on Outward Supply.

Inverted Tax Structure – Examples :

Fertilizer Industry, Pharmaceutical Companies, Fabric Manufacturers and Stainless Steel Utensil manufacturers are facing this type of situation where they pay higher taxes on their raw materials, consumables, packing materials and other inputs etc but liable to pay lower rate of tax on outward supply. Below figure is self-explanatory in different situations.

Inverted Tax Structure

Justification for Refund of Accumulated Input Tax Credit

Inverted duty structure generally results in accumulation of excess taxes credit. Since rate of tax on outward supplies is lesser than rate of tax on inputs this results in accumulations of unutilized input tax credit and thus need of refund arises.

Refund of Accumulated Input Tax Credit

Section 54(3) of the CGST Act 2017 provides :

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

Provided that no refund of unutilised input tax credit shall be allowed in cases other than–

(i) zero rated supplies made without payment of tax;

(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:

Provided further that no refund of unutilised input tax credit shall be allowed in cases where the goods exported out of India are subjected to export duty:

Provided also that no refund of input tax credit shall be allowed, if the supplier of goods or services or both avails of drawback in respect of central tax or claims refund of the integrated tax paid on such supplies.

Refund of Un-utilized Input Tax Credit

Textile Industry Analysis:

The Indian Textile industry is highly fragmented sector. India’s textile industry is comprised mostly of small-scale, nonintegrated spinning, Weaving and Knitting, processing / finishing, and apparel-making enterprises. This unique industry structure is primarily a legacy of government policies that have promoted labor intensive, small-scale operations and discriminated against larger scale firms. Also there is no uniform tax structure across the entire value chain. The Indian textile industry can be divided into three segments: 1) Cotton Textiles 2) Synthetic Textiles 3) Other like Wool, Jute, Silk, etc. Taxes and duties are varying nature and exemptions taxes were prevailing in most of the non-synthetic sector. This is resulted into breakage of credit chain and in many phages in the supply chain taxes are absorbed as cost.

In the GST regime almost entire textile industry is brought into tax net barring a few, so that input tax credit chain is maintained throughout the value chain.

Inverted Tax Structure in case of Fabric Manufacturing :

In Fabric manufacturing, inputs like yarn (Cotton & Synthetic), Process Chemicals, Packing Materials and other services falls under varying tax levels from 5% to 18% as shown in the figure below, which aggregates to much higher tax than the applicable tax rate of 5% on finished goods ie fabrics. This Resulted in Inverted Tax Structure and Accumulation of Input Tax Credit.

Resulting in Inverted Tax Structure

Restriction on Claiming the Refund of Accumulated ITC :

Though in general refund is allowed in case of Inverted Tax Structure as per Sec 54(3)(ii) of CGST Act, however vide Notification No : 5/2017-Central Tax rate dated 28.06.2017, such refund is restricted for fabrics. This resulted into hardships of blockage of funds as Input Tax Credit is getting Accumulated and no refund is allowed vide above notification.

Inverted Tax

Relief by way of Refund :

Conceding to long standing demand of the industry and recognizing the difficulty being faced by the textile industry, government has finally addressed the issue by issuing Notification No. 20/2018-Central Tax (Rate) dated 26.07.2018 by amending Notification No. 5/2017-Central Tax rate dated 28.06.2017, where in inserted a following proviso in Notification No. 5/2017-Central Tax rate dated 28.06.2017, which reads as under:

(i) nothing contained in this notification shall apply to the input tax credit accumulated on supplies received on or after the 1st day of August 2018, in respect of goods mentioned at serial numbers 1, 2, 3, 4, 5, 6, 6A, 6B, 6C and 7 of the Table below; and

(ii) in respect of said goods, the accumulated input tax credit lying unutilised in balance, after payment of tax for and upto the month of July 2018, on the inward supplies received up to the 31st day of July 2018, shall lapse.

That means

Refund of Input Tax Credit is available for supplies received on or after 1st Aug’2018

Net Accumulated Input Tax Credit after adjusting towards July month Tax liability and lying un-utilised in balance upto 31st July, shall Lapse.

Goods Covered

Accumulaed CreditConfusions Galore :

Now, amid good news of refund of accumulated credit, there are some confusions :

Since the Accumulated Un-utilized Credit upto 31st July’2018 after adjustment of tax payment for the month of July’18 shall lapse, then what about the Stocks Lying upto 31st July’18?

There is also doubt about eligibility of Refund of Accumulated Input Tax Credit on account of Capital Goods.

Let us now discuss these issues

Lapse of Credit :

It seems there is some lapse on the part of the authorities which ignored the available stocks in hand upto 31st July’18. The CBIC Board need to Clarify.

Stocks In the Form

Refund of Accumulated Input Tax Credit on account of Capital Goods

Let us now discuss on the issue of Refund of Accumulated Input Tax Credit on account of Capital Goods.

Let us discuss various terms and provisions used in GST Law.

Refund : As per Explanation to Sec 54(14)

Explanation.—For the purposes of this section,––

(1) “refund” includes refund of tax paid on zero-rated supplies of goods or services or both or on inputs or input services used in making such zero-rated supplies, or refund of tax on the supply of goods regarded as deemed exports, or refund of un-utilised input tax credit as provided under sub-section (3).

RefundInput Tax Credit

As per Section 2(63) – “input tax credit” means the credit of input tax.

Input Tax

Section 2(62) – “input tax” in relation to a registered person, means the Central tax, State tax, integrated tax or Union Territory tax charged on any supply of goods or services or both made to him and includes-

(a) the integrated goods and services tax charged on import of goods;

(b) the tax payable under the provisions of sub-section (3) and (4) of section 9;

(c) the tax payable under the provisions of sub-section (3) and (4) of section 5 of the Integrated Goods and Services Tax Act;

(d) the tax payable under the provisions of sub-section (3) and sub-section (4) of section 9 of the respective State Goods and Services Tax Act; or (e) the tax payable under the provisions of sub-section (3) and sub-section (4) of section 7 of the Union Territory Goods and Services Tax Act, but does not include the tax paid under the composition of levy.

Input Tax

Thus input tax credit shall mean taxes paid on goods and services whether under direct charge or reverse charge whether on domestic procurement or on importation. But credit of composition fees shall not be admissible.

From the above it is obvious that there is restriction anywhere in the Act regarding Input Tax and Refund regarding Credit Pertaining to Capital Goods.

However, strictly going by the intention behind the provisions in the law and common sensual logic that inverted tax structure arise when tax rate of inputs is more than tax rate on finished goods outward supply, it can be drawn that refund of accumulated tax credit pertaining to inputs only and not capital goods.

This intention of the law clearly exhibited in the Rule 89(5) of CGST Rules 2017 –

In the case of refund on account of inverted duty structure, refund of input tax credit shall be granted as per the following formula:-

Maximum Refund Amount

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

(a)”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; and

(b) “Adjusted Total Turnover” shall have the same meaning as assigned to it in sub-rule (4).”

By reading the definition of Net ITC it can be inferred that refund shall be restricted to the taxes paid on inputs only. It does not cover input services and capital goods within its purview.

However, Board need to clear these doubts.

In fact, the Real Problem the Textile Industry facing now is related to huge amounts of Input Tax remaining un-utilized on account of Capital Goods which they procure either for a Green Field Project, Expansion, Modification or up-gradation of the Plant and Machinery. On Procurement of Capital Goods, GST payable in general is 18%, whereas Cotton Yarn and Fabric are charged at 5% only. This resulted into large amounts of credits remained un-utilized, mean funds are blocked to that extent. This is also a major inhibiting factor for growth of the industry.

To come across the issue my suggestion is to reduce the GST rate on Textile related machinery to 5%, so that a major relief may be seen related to accumulation of credits.

Disclaimer : The views and opinions; thoughts and assumptions; analysis and conclusions expressed in this article are those of the authors and do not necessarily reflect any legal standing.

Author : SN Panigrahi, GST Consultant, Practitioner, Corporate Trainer & Author

Can be reached @ [email protected]

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  1. Someone should point out how the credit of surplus input taxes paid by garment exporters lapse.
    And the refund of the same by denied to exporters.
    On the other hand, interest should be mandatorily paid by the Govt. for keeping the money of the exporters…

  2. gopikishan kabra says:

    best analysis for notification no 20/2018. everyone is confused for it that how can they lapse surplus duty ? notification is an important document if it is a mistake its shameful and if it is in real then its not a relief its a punishment for textile industry. everyone is confused but there is no any clarification as it is 13 th day.

    thanks a lot sir its a nice article.

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September 2021