Introduction:

Not all persons are eligible to claim refund of unutilised input tax credit. Only those specified in Section 54(3) of the CGST Act, 2017 are eligible to claim refund of balance in Electronic credit ledger. The specified instances being:

  • Zero rated supplies made without payment of tax (i.e. export of goods/services under LUT or supply of goods/services to an SEZ unit).
  • Outward supplies under Inverted Rate Structure

What is inverted rate structure?

Normally, in a value added tax system there should always be tax payable by the tax payer. So is the case with GST. However in an inverted rate structure, even though there is value addition by the tax payer, the tax payer would never be liable to make any payment of tax and always have a balance of unutilised ITC.

Consider the below example:

Inputs Rate Output Rate
Non Woven Fabric 12% Fabric Bags 5%

Assuming Rs. 100 of the above input is processed to produce the above output and sold at Rs. 200. The carry forward ITC would be Rs. 2, even though there is a value addition. The tax payer would never be liable to pay GST and would never be able to transfer the incidence of GST for the Rs. 2 on the customers. Hence the option of refund is given to them.

The Act does not define anything like “inverted rate structure”. This is generally used to refer to Section 54(3)(ii) of the CGST ACT, 2017, 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:“

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

  • Rate tax on inputs is higher than the rate of tax on output supplies. As per Section 2(59), the term “input” means any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business.

Grey Areas:

1. ITC accumulated on account of GST paid on capital goods and input services will not be eligible for refund. When such a concept of inverted rate structure has been introduced, its application should have been liberal for reaping maximum benefits to the tax payers. Else it only appears to be a sham in the name of relief.

2. 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 untilised to the inputs is a nightmare.

3. The term output supplies has not been defined, it may 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;

However clarity on this is awaited.

  • Exempted or Nil Rated output supplies are not eligible for refund.
  • Goods or services as notified by the government shall not be eligible for refund.

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

Recently, Notification No. 20/2018 – CGST (Rate) dated 26.07.2018 was issued to make amendment to Notification No. 5/2017 – CGST (Rate) and allow certain specified goods of textile sector to be eligible for refund from 1st August 2018.

The Controversy:

The Notification No. 20/2018 – CGST (Rate) dated 26.07.2018 though provided a relief to the textile sector, however fine reading of the notification reveals that any balance of Input Tax Credit as on 31st July 2018 shall lapse.

This notification was introduced under the powers given under Section 54(3)(ii). Using such powers the government on the recommendation of the GST Council could only notify goods/services which would not be eligible for refund of unutilised ITC GST Council.

However the notification restricted the carry forward of balance of ITC as on 31st July 2018, which appears to be controversial and illegal.

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 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 – CGST 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 – CGST dated 13.06.2018 was issued to give the above amendment a retrospective effect from 01.07.2017.

The Sham:

Even after the retrospective amendment there appears to be no great benefit to service providers as refund of only GST paid on inputs is available. However the major inward supply in most service sectors is input services only.

Another 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 – CGST or Notification 40/2017 – CGST (Rate) or Notification 41/2017-IGST (Rate) or Notification 78/2017- Customs.

2. “Adjusted Total turnover” means the turnover in a State or a Union territory, as defined under clause (112) of section 2, excluding –

  • the value of exempt supplies other than zero-rated supplies and
  • the turnover of supplies in respect of which refund is claimed under sub rules (4A) or (4B) or both, if any, during the relevant period;

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

ITC on capital goods and input service can be availed [except the balance as on 31st July 2018 for goods specified in Notification No. 20/2018 – CGST (Rate) dated 26.07.2018, which will lapse]. The bar is only on claim of refund. The ITC 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 in step 2 will get debited in the electronic credit ledger

4. The application GST RFD – 01A shall be submitted to the jurisdictional officer 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.

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13 Comments

  1. Sunny Chauhan, Advocate says:

    Ma’am Please clarify effect of notification no 45/2017 dt 14.11.17, due to which input is lying in our ledger, government officials are denying refund of unutilised credit, and we are suffering from unbearable loss.

    Thanks and regards

  2. kamlesh says:

    If the person have inverted tax structure and he also supplies goods to SEZ units than under which category we should claim refund either in inverted tax structure or refund on account of supply to SEZ with/without payment of tax????

  3. vswami says:

    “What is inverted rate structure?
    “Normally,…………….”
    “The tax payer would never be liable to pay GST and would never be able to transfer the incidence of GST for the Rs. 2 on the customers. Hence the option of refund is given to them”

    Is there not an abnormality; in that makes for a strikingly awesome clean departure, devoid of any sound logic ?!

    Why and how it fits into the general scheme of things aimed at simply ensuring ‘no cascading effect’ – adverse to the ‘recipient’ of ‘output’ supply- herein it is the SEZ !

    Unless it is intended to serve as/ provide an incentive to supply to SEZ (a ‘deemed export’) ?!

    Does it have the characteristics of a ‘SUBSIDY’; if yes, are there not inherent problems for tax and accounting?

    One has in mind issues which arose in regard to other ‘export incentives’ – e.g. Duty Draw Back –
    Duty Drawback and Entitlement schemes are incentives: SC …
    Messrs. Liberty India vs CIT ( 2009)

    Of relevance comment posted @ –
    Important Takeaways from Master Circular on GST refund

  4. ravindra nath says:

    Sir what is the fate of a tax supplier if he purchases a good @ 18% and sells @5% as per Exemption notification to research institutes such as CSIR. Can he claim refund of ITC under inverted tax structure

  5. mukesh says:

    itc on capital goods used for output supply and remaining itc on input can be claim refund under inverted duty structure
    like
    itc @18% 220000
    itc on capital goods 200000
    out put tax on supply @5% 200000
    can we use itc200000 of capital goods for outpur supply tax 200000 and remaing itc on purchase 220000 can be claim refund under inverted duty structure

  6. Rajender Dhingra says:

    recently there was a decision by rajasthan High court allowing relief to the suppliers seeking credit on input services can you provide thar judgement please

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