Refund in case of Inverted Tax Structure under GST

1. Inverted Tax Structure

‘Inverted tax Structure’ is a situation where the rate of tax on inputs supplies is more than the rate of tax on output supplies.

2. Relevant provisions under GST Law and their Interpretation

♣ Section 54 (1) of CGST Act 2017 provides that Any person claiming refund of any tax and interest, if any, paid on such tax or any other amount paid by him, may make an application before the expiry of two years from the relevant date in such form and manner as may be prescribed.

♣ Section 54(3) of CGST Act 2017 reads as follows:

(3) 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.

♣ In exercise of the powers conferred by section 54(3) the government has issued Notification no. 15/2017-Central Tax (Rate) dated 28.06.2017 wherein it has been notified that refund of unutilised input tax credit shall not be allowed under subsection (3) of section 54 of the said CGST Act, 2017, in case of supply of services specified in sub-item (b) of item 5 of Schedule II of the CGST Act, 2017. (Notification attached)

♣ In respect of goods, the central government has issued Notification no. 5/2017- Central Tax (Rate) dated 28.06.2017 as amended by Notification 44/2017-Central Tax (Rate) dated 14.11.2017 (Notifications attached ).

♣ Section 54(10) of CGST Act 2017 provides that where any refund is due under sub-section (3) to a registered person who has defaulted in furnishing any return or who is required to pay any tax, interest or penalty, which has not been stayed by any court, Tribunal or Appellate Authority by the specified date, the proper officer may—

(a) withhold payment of refund due until the said person has furnished the return or paid the tax, interest or penalty, as the case may be;

(b) deduct from the refund due, any tax, interest, penalty, fee or any other amount which the taxable person is liable to pay but which remains unpaid under this Act or under the existing law. Explanation.––For the purposes of this sub-section, the expression “specified date” shall mean the last date for filing an appeal under this Act.

3. Analysis of Above Relevant sections

♣ Section 54(3) allows refund of unutilized input tax credit only in 2 scenarios:

(i) zero rated supplied without payment of GST; and

(ii) credit accumulation on account of inverted duty structure.

♣ As per Provisos to section 54(3) no refund of unutilised input tax credit will be allowed in the following cases:

(i) If the goods exported out of India are subjected to export duty

(ii) 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.

♣ As per para 59 of circular 125/44/2019 dated 18/11/2019 it has been clarified that The supplier who supplies goods at the concessional rate is also eligible for refund on account of inverted tax structure as per the provisions of clause (ii) of the first proviso to sub-section (3) of section 54 of the CGST Act. In such cases also, refund can be applied under Section 54 of the CGST Act, 2017 read with Rule 89 of the CGST Rules, 2017. It may also be noted that the exporter of such goods can export the goods only under LUT / bond and cannot export on payment of Integrated tax. (Circular attached)

♣ A tax period is the period for which return is required to be furnished.

♣ The supplies specified under item 5(b) of Schedule II of CGST Act 2017 are construction services.

4. Timeline to file Refund application

As per section 54(1) refund application can be filed before the expiry of 2 years from the relevant date. Such date is explained vide Para 2 of the Explanation to the Section 54 of the CGST Act. As per Explanation 2( e) to section 54 in the case of refund of unutilised input tax credit under clause (ii) of the first proviso to section 54(3) ( accumulation of tax due to inverted tax structure) , relevant date for the purpose of section 54(1) is the due date for furnishing of return under section 39 for the period in which such claim for refund arises

5. Other Relevant Refund related Sections under CGST Act 2017 in Tabular Format

6. Relevant Rules under CGST Rules 2017 in Tabular Format

7. Calculation of Refund Claim

♣ In the case of refund on account of inverted tax structure, refund of input tax credit shall be granted as per the following formula as per Rule 89(5) of CGST Rules 2017 :

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

♣ As per Explanation a of Rule 89(5) – “Net ITC” for the purpose of refund on account of inverted rate structure means 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-CGST or Notification 40/2017 – CGST (Rate) or Notification 41/2017-IGST (Rate) or Notification 78/2017- Customs. Further Adjusted Total turnover and relevant period shall have same meaning assigned to them in Rule 89(4).

♣ As per Rule 89(4)(E) – Adjusted Total Turnover means

• the turnover in a State or a Union territory, as defined under clause (112) of section 2, excluding the turnover of services; and
• the turnover of zero-rated supply of services determined in terms of clause (D) 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.

♣ As per Rule 89(4)(F) – Relevant period means the period for which the claim has been filed

♣ As per Rule 89(4)(D) – Turnover of zero-rated supply of services” means the value of zero-rated supply of services made without payment of tax under bond or letter of undertaking, calculated in the following manner, namely:-

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;

♣ As per Section 2(59) of CGST Act 2017, the term “input” means any goods other than capital goodsused or intended to be used by a supplier in the course or furtherance of business. Kindly note that ITC accumulated on account of GST paid on capital goods and input services will not be eligible for refund.

♣ As per Section 2(112) of CGST Act 2017, “turnover in State” or “turnover in Union territory” means the aggregate value of all taxable supplies (excluding the value of inward supplies on which tax is payable by a person on reverse charge basis) and exempt supplies made within a State or Union territory by a taxable person, exports of goods or services or both and inter-State supplies of goods or services or both made from the State or Union territory by the said taxable person but excludes central tax, State tax, Union territory tax, integrated tax and cess;

8. Procedure / Process of Refund application

♣ The CBEC issued a circular 125/44/2019 dated 18/11/2019 which lays down detail set of guidelines and processing of refund to be done electronically. Gist of the circular is as follows:

The application shall be, inter alia, filled with statements/ declarations/undertakings.

Documents/tax invoices shall be required for processing of the refund application be uploaded with the form.

A comprehensive list of documents is provided at Annexure-A (Attached) of the above circular

No other document needs to be provided at the stage of filing of the refund application except which are required and stated in Annexure-A of the above circular.

Four Attachments maximum size of 5 MB may be uploaded with the Refund Application.

Neither the refund application in FORM GST RFD-01 nor any of the supporting documents shall be required to be physically submitted to the office of the jurisdictional proper officer

The Application Reference Number (ARN) will be generated only after the applicant has completed the process of filing the refund application in FORM GST RFD-01, and has completed uploading of all the supporting documents/ undertaking.

The application shall be deemed to have been filed under sub-rule (2) of rule 90 of the CGST Rules on the date of generation of the said ARN.

The time limit of 15 days to issue an acknowledgement or a deficiency memo, as the case may be, shall be counted from the date of ARN.

The acknowledgement (FORM GST RFD-02) for the complete application or deficiency memo (FORM GST RFD-03), as the case may be, would be issued electronically

Refund application may be filed for a tax period either monthly or quarterly. Quarterly return filers can only file refund application quarterly. The applicant may club successive tax periods with the refund application but he cannot club tax period of different financial years. For example refund application pertaining to 2018-19 can not be clubbed with refund pertaining to 2019-20.

However vide Circular No.135/05/2020 dated 31-03-2020 the restriction on bunching of refund claims across financial years shall not apply. For example Refund Application can be filed by clubbing of months of March 2019 and April 2019 and for two quarters 4^th quarter of 2018-19 and 1^st quarter 2019-20

Once an acknowledgement has been issued in relation to a refund application, no deficiency memo, on any ground, may be subsequently issued for the said application.

A fresh application could be filed after correction/rectification of deficiencies as pointed out.

Once an application has been submitted afresh, pursuant to a deficiency memo, the proper officer will not serve another deficiency memo with respect to the application for the same period, unless the deficiencies pointed out in the original deficiency memo remain un-rectified, either wholly or partly, or any other substantive deficiency is noticed subsequently.

A rectified refund application, submitted after correction of deficiencies, shall also have to be submitted within 2 years of the relevant date.

In terms of para 36 of circular No. 125/44/2019-GST dated 18.11.2019, the refund of ITC availed in respect of invoices not reflected in FORM GSTR-2A was also admissible and copies of such invoices were required to be uploaded. However, in wake of insertion of sub-rule (4) to rule 36 of the CGST Rules, 2017 vide notification No. 49/2019-GST dated 09.10.2019, various references have been received from the field formations regarding admissibility of refund of the ITC availed on the invoices which are not reflecting in the FORM GSTR-2A of the applicant. As per Para 5 of Circular no 135/05/2020- GST dated 31/03/2020, The matter has been examined and it has been decided that the refund of accumulated ITC shall be restricted to the ITC as per those invoices, the details of which are uploaded by the supplier in FORM GSTR-1 and are reflected in the FORM GSTR-2A of the applicant. Accordingly, para 36 of the circular No. 125/44/2019-GST, dated 18.11.2019 stands modified to that extent.

As provided in circular No. 125/44/2019-GST dated 18.11.2019 and modified in Circular No.135/05/2020 – GST dated 31/03/2020 format of Annexure B is attached separately. HSN Code / SAC is also required to be mentioned for each invoice.

It is clarified that the exporter will be eligible to take credit of concessional rate of the tax paid by him.

It is clarified that the input tax credit of invoices issued in August, 2019, “availed” in September, 2019 cannot be excluded from the calculation of the refund amount for the month of September, 2019.

It is clarified that the ITC of the GST paid on inputs, including inward supplies of stores and spares, packing materials etc., shall be available as ITC as long as these inputs are used for the purpose of the business and/or for effecting taxable supplies, including zero-rated supplies, and the ITC for such inputs is not restricted under section 17(5) of the CGST Act. Further, capital goods have been clearly defined in section 2(19) of the CGST Act as goods whose value has been capitalized in the books of account and which are used or intended to be used in the course or furtherance of business. Stores and spares, the expenditure on which has been charged as a revenue expense in the books of account, cannot be held to be capital goods

9. Documents required for preparation and submission of the application:

Declaration under second and third proviso to section 54(3)

Declaration under section 54(3)(ii)

Undertaking in relation to sections 16(2)(c) and section 42(2)

Statement 1 under rule 89(5)

Statement 1A under rule 89(2)(h)

Statement of Invoices in Annexure B

Extract of Form GSTR-2A

GST registration certificate

Refund ARN Receipt

Filed GSTR-3B and GSTR-1

Monthly Sales register for the month

Monthly Purchase register for the month

Reconciliation Statement of Sale & Purchase registers with GSTR-3B & GSTR-1

Verification