The sub-section 3 of section 54 of the CGST/SGST Acts, 2017 (Hereinafter referred to as “the Act”), provides for refund of any unutilized input tax credit to a registered person in following two cases:-

Case 1st: Zero rate supplies made without payment of tax.

Case 2nd: Where accumulation of unutilized ITC on accounts of higher rate of tax on inputs than the rate on output supplies other than nil rate or fully exempt supplies.

In 2nd case which is commonly known as inverted duty structure (no such term used in the Act but in rule), one exception is there that on notified supplies of goods and services or both, refund shall not be granted even if accumulation of ITC is due to inverted duty structure.

On 28th June, government had issued notification No. 5/2017 and 15/2017 specifying the goods and services respectively debarring the refund in respect of so specified goods or services under section 54(3) of the Act.

Sub-rule (5) of rule 89 as substituted by the Central/States Goods and Services Tax (Fourth Amendment) Rules, 2018, w.e.f. 18-4-2018, lays down the formula for calculation of eligible refund amount in case of inverted duty structure which is as under:-

Maximum refund
Amount
= Turnover of inverted rated supply of goods and services X Net ITC Tax payable on such inverted rated supply of goods and services
Adjusted Total Turnover

The explanation to this rule provides meaning of two expressions used in the above formula as under-

(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-rule (4A) or (4B) or both; and

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

Prior to substitution of this rule, meaning of expression “Net ITC” was as referred to in sub-rule (4) which was ‘input tax credit availed on inputs and input services during the relevant period’.

The term “Input” and “Input Service” has been defined under section 2(59) and 2(60) of the CGST/SGST Acts, 2017 respectively, reproduced as under:-

(59) “input” means any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business;

(60) “input service” means any service used or intended to be used by a supplier in the course or furtherance of business;

The term “Inputs” is nothing but plural form of term “Input” as defined u/s 2(59) of the Act.

Now, the point is, prior to substitution of rule 89, the Act allowed refunds in case of output supply of goods or services or both but formula, as laid down in the corresponding said rule, considered only ‘turnover of inverted rated supply of goods’, not of ‘supply of services. Owing to such anomaly in the rule, the service providers (including job workers) were being deprived from benefit of refund provision in case of inverted duty structure causing unduly blockage of capital. Such anomaly was removed by amending the rule vide the Central/States Goods and Services Tax (Fourth Amendment) Rules, 2018 w.e.f. 18.04.2018. Now, as per the amended formula, the turnover of inverted rated supply of goods and/or services, both are considered for the purpose of calculation of eligible refund amount thus cleared the way for service providers (including job workers) for claim of refund in case of inverted duty structure.

However, the term “Net ITC”, prior to such amendment, being contrary to the provision of the act, included the input tax credit availed on (inputs and) input services. This gave the impression that input tax paid on both inputs and input services are eligible for refund u/s 54(3) of the Act which was not so.

It is pertinent to mention here that post amendment, since no change in the provision of the Act, input tax credit on input services are not eligible for refund as only word “Inputs” has been used in the language of section 54(3) of the Act, not “Inputs and Input Services” as mentioned in meaning of “Refund” provided in the explanation to section 54 reproduced as under:-

Explanation:- for the purpose 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 supply of goods regarded as deemed export, or refund of unutilized input tax credit as provided under sub-section (3).

Above definition of refund for the purpose of section 54 clearly reveals that ‘Inputs’ and ‘Input Services’ are two different expression and the expression “Inputs” [as defined u/s 2(59)] can’t, even by any stretch of imagination, be said to include “Input Services” [as defined u/s 2(60)]

Further, the expression “Net ITC”, post amendment, also does not explicitly includes input tax paid on “Input Services”.

In view of above analysis, It is amply clear that in case of refund of unutilized ITC accumulated on account of higher tax rates on inputs than the outward supplies of goods or services or both as provided u/s 54(3) of the CGST/SGST Acts, 2017, tax paid on inward supply of services used for making such outward supplies of goods or services of both, is not refundable. Accordingly, one is need to exclude the amount of ITC towards inward supply of services from the total ITC availed for the relevant period for which claim is being made in order to calculate “Net ITC”.     

CA Lalit Talesara, Pali (Raj.)

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Company: AJLT & Associates
Location: PALI, Rajasthan, IN
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One response to “No Refund of Tax Paid on Input Services in case of Inverted Duty Structure – An analysis”

  1. Ravindra Naik says:

    Very Good analysis . However the author has not explained the following:
    1) How to arrive/workings at inverted rated supply of goods and services
    2) Tax payable on such inverted rated supply of goods and services .
    I am giving an example of Rs 100 with break up as follows :-

    Material Purchase Rs 30 @12% . GST amt will be Rs 3.6. Material Purchase @ 40 . GST @18% . GST amt Rs 7.2 . Purchase of Design & Engg Services Rs 20 .GST @18%. Profit Rs 10. Works Contract GST @12% . Therefore Selling price Rs 100 +12 = Rs 112 . In this scenario please advise as follows :-
    1) What is the turnover of inverted rated supply of goods & services
    2) Tax payable on such inverted rated supply of goods and services
    3) What is the % of input tax credit on services as % of Selling price which is not refundable and hence cost

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