The Hon’ble Government through the GST council has been amending the GST law to solve the problems faces by tax payers. However, to resolve the problems in hand, the amended provisions have created problems dismissing the purpose of such amendments.

BACKGROUND OF ISSUE

Relevant notifications/ Circulars

1. Notification no. 5/2017-Central tax (Rate) dated 28.06.2017

2. Notification No. 20/2018-Central Tax (Rate) dated 26.7.2018

3. Circular No. 56/30/2018-GST dated 24.08.2018 vide F. No. 354/290/2018- TRU

The manufacturing of woven fabrics (taxable @ 5%) requires input of manmade yarn (taxable at 12%), which accumulated high amount of ITC for manufacturers.

Wide Notification no. 5/2017-Central tax (Rate) dated 28.06.2017, items were notified on which refund of accumulated input tax credit on account of inverted duty structure was not allowed. The list included the following items pertaining to textiles industry:

S.

No.

Tariff item, heading, sub-heading or Chapter Description of Goods

(1)

(2)

(3)

1. 5007 Woven fabrics of silk or of silk waste
2. 5111 to 5113 Woven fabrics of wool or of animal hair
3. 5208 to 5212 Woven fabrics of cotton
4. 5309 to 5311 Woven fabrics of other vegetable textile fibres, paper yarn
5. 5407, 5408 Woven fabrics of manmade textile materials
6. 5512 to 5516 Woven fabrics of manmade staple fibres
7. 60 Knitted or crocheted fabrics [All goods]

Later on demand of the industry, wide Notification No. 20/2018-Central Tax (Rate) dated 26.7.2018, the refund of accumulated ITC on fabric on account of inverted tax structure was allowed with effect from 01.08.2018, by amending notification no. 5/2017-Central tax (Rate) dated 28.06.2017.

Further, notification 20/2018-Central Tax (Rate) dated 26.7.2018 provided that accumulated ITC, lying unutilized for the past period i.e. up to July 2018 shall lapse after the payment of GST for the month of July 2018. This created a huge dilemma for manufacturers.

However, It was later clarified wide Circular No. 56/30/2018-GST dated 24.08.2018 that the manner of calculation as provided in rule 89(5) of CGST Rules, 2017 would mutatis mutandis apply for the calculation of lapse of accumulated ITC, lying unutilized for the past period i.e. from July 2017 to July 2018 as provided in notification no. 20/2018-Central Tax (Rate) dated 26.7.2018. (para 10 of circular ibid). In short, the eligible refund, as per formula under rule 89(5), for period July 2017 to July 2018 was required to be lapsed.

That para 14 of the circular no. 56/30/2018-GST dated 24.08.2018 provides that amount of ITC to be lapse shall be furnished in column 4B(2) of GSTR-3B [ITC amount to be reversed for any reasons (others)] of August 2018

THE FAR REACHING IMPACT OF THE NOTIFICATION:

The government did not notice that the lapsing of accumulated ITC in the GSTR 3B of the August 2018 month will impact the refund due for the month of August 2018.

Formula provided in rule 89(5) for computing refund

(Net ITC x inverted rated turnover / total adjusted turnover) – tax paid on inverted rated turnover = Refund amount

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

Illustration (Extract of 3B):

3.1 Details of Outward Supplies and inward supplies liable to reverse charge

Nature of Supplies Total Taxable value IGST CGST SGST/UT Tax Cess
-1 -2 -3 -4 -5 -6
(a) Outward taxable supplies (other than zero rated, nil rated and exempted) 10,000,000 0 250000 250000 0
(b) Outward taxable supplies (zero rated) 0 0 0 0 0
(c) Other outward supplies (Nil Rated, exempted) 0 0 0 0 0
(d) Inward supplies (liable to reverse charge) 0 0 0 0 0
(e) Non-GST outward supplies 0 0 0 0 0

Table 4. Eligiable ITC

Details IGST CGST SGST/UT Tax Cess
-1 -2 -3 -4 -5
(A) ITC Available (whether in full or part)
(1) Import of goods 0 0 0 0
(2) Import of services 0 0 0 0
(3) Inward supplies liable to reverse charge (other than 1 & 2 above) 0 0 0 0
(4) Inward supplies from ISD 0 0 0 0
(5) All other ITC 0 500,000 500,000 0
(B) ITC Reversed
(1) As per rules 42 & 43 of CGST Rules 0 0 0 0
(2) Others 0 15,00,000 15,00,000 0
(C) Net ITC Available (A) – (B) 0 -10,00,000 -10,00,000 0

In the above illustration, even though the tax payer is eligible for refund of Rs. 500,000, he will not get refund considering the Net ITC available (i.e. after lapsing of accumulated credit of Rs. 30,00,000) is negative.

Legal Position

As per rule 89(5) of CGST Rules, 2017, net ITC is meant to be the input tax credit availed on the inputs and reduction of amount of ITC lapsed from the ITC to arrive at amount of Net ITC is neither justified nor the intention of law.

That amount of Net ITC for the propose of rule 89(5) of CGST Rules, 2017 shall be the input tax credit availed on the inputs, without reducing the amount of ITC lapsed as mentioned in GSTR-3B in compliance of circular no. 56/30/2018-GST dated 24.08.2018.

The tax payer wait for the clarification/ circular from the government while waiting for the refund for the month of Aug 2018.

Author Bio

Qualification: CA in Practice
Company: N/A
Location: Bhilwara, Rajasthan, IN
Member Since: 16 Feb 2019 | Total Posts: 1

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5 Comments

  1. Rajender jindal says:

    Dear sir

    If balance in electronic credit ledger after reversal is less than amount of input on closing stock as on 31.07
    18, what will be the remedy.

    If no then it will amount to double taxation

    1. somanialok says:

      Sir, the notification Circular No. 56/30/2018-GST dated 24.08.2018 states that input lying in the closing stock 31.07.2018 should be excluded from “Net ITC” while applying formula as per Rule 89(5). However, if after reversal, the ITC balance is less than input lying in the closing stock as on 31.07.2018, it clearly shows that you have utilized the credit of input lying in the closing stock as on 31.07.2018. For example, if you have inverted as well as other goods manufacturing, you have to pay GST on the GP of the other goods. However. due to inverted goods manufacturing, you get ITC (excess ITC on inverted goods) to set off against the GST payable on the GP of the other goods.

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