Goods and Services are classified mainly under five slabs under Goods and Services Tax Act, 2017: 0%, 5%, 12%, 18% and 28%. Normally there should always be a liability to pay GST due to Value Addition by the Taxable person. However due to multiple tax rates there might arise a situation despite value addition, wherein GST rate on Inputs is higher than GST rate on Outputs resulting into Refund of Taxes- Inverted Duty Structure. Government has tried to minimize such situations. Also, GST Act has restricted ITC and Refund for NIL rated Supplies. However some Industries are still falling under Inverted Duty Structure and eligible for Refund, following details pertains to a few such Manufacturing Units:

Sr. No. Industry Input Description Input GST Rate Output Description Output GST Rate Accumulation of ITC (% of Turnover)*
1 E Rickshaw MS Pipe, Sheet

Battery, Electricals

18%

28%

E Rickshaw 12% 5%
2 DG Sets Engine 28% DG Set 18% 6%
3 LED Lamps LED Drivers

Cabinet

18% LED 12% 2%
4 Non Woven Fabric Bags Non Woven Fabric 12% Fabric Bags 5% 5%
5 Interlining Fabric Polyster Yarn 18% Interlining 12% 2%

* Estimated Accumulation of ITC in the Industry eligible for refund.

More than Eight Months have passed since GST was implemented but still most of the Industries falling under Inverted Structure are unable to file Refund applications due to various issues in refund process. One of such issues pertains to Error in Filling Refund application online in case of Cross Utilization of ITC.

 Let’s first understand the legal process for Refund of Unutilized ITC on account of Inverted Structure inorder to understand the issue being faced.

LEGAL BACKGROUND

Refund of Accumulated ITC on account of Inverted Duty Structure         

 Sub- Section(3) of Section 54 ‘Refund of Tax’ of CGST Act, 2017 provides for Refund of Unutilized ITC accumulated on account of rate of tax of Inputs being higher than the rate of tax on output supplies (other than Nil rated or fully exempt supplies).

Sub- Rule (5) of Rule 89 ‘Application for Refund of Tax, Interest, Penalty, Fees or any other amount’ of CGST Rules, 2017 provides for Maximum Eligible Refund Amount for Inverted Duty Structure:

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.

Where, ‘Net ITC’ means Input Tax Credit availed on inputs and input services during the relevant period;

‘Adjusted Total Turnover’ means the turnover in a state or Union Territory, as defined under clause (112) of Section 2, excluding the value of Exempt Supplies other than Zero Rated Supplies, during the relevant period.

Clause (112) of Section 2 ‘Turnover in a State’ means Aggregate Value of

all Taxable Supplies (excluding the value of inward supplies on which tax is payable by a registered person on reverse charge basis) and

exempt supplies made within a state by a taxable person,

export of goods or services or both and

Inter State supplies of Goods or Services or both made from the state by the said taxable person

but excludes Central Tax, State Tax, Union Territory Tax, Integrated Tax and Cess.

‘ Tax Payable on such inverted rated supply of goods’ means tax payable on such inverted rated supply of goods under the same head i.e. IGST, CGST, SGST.(Not defined anywhere in the Act or the Rules, however same is mentioned in the User Manual on GST Portal for filling Refund Application)

‘Relevant Period’ means the period for which the claim has been filled.

MANUAL FILLING AND PROCESSING OF REFUND CLAIMS

Due to Non availability of Refund Module on the common portal, Government has vide Circular No.- 24/24/2017-GST; Dated 21 December 2017 prescribed Manual filling and processing of Refund claims on account of Inverted Duty Structure. Following process is prescribed in the circular for manual filling of Refund Application:

  • Application for Refund shall be filled in Form GST RFD-01A on the common portal and the amount claimed as refund shall get debited in the Electronic Credit Ledger.
  • The Common Portal shall generate a proof of debit (ARN- Acknowledgement Receipt Number)
  • The Applicant shall submit Application for Refund ( FORM GST RFD 01A and ARN) alongwith all necessary documentary evidence as applicable to the Jurisdictional proper officer.

ISSUE IN QUESTION (RFD01A)

The calculation of ‘Maximum Refund Amount’ as  mentioned in  Rule 89(5) of CGST Rules, 2017  as read with the Procedural Instructions (User Manual) works perfectly fine if there is no cross utilization of ITC. If all the Inward and Outward Supplies of taxable person are Intra state  or if all the sale and purchases are outside the sate  there will be no cross utilization of ITC. (Credit in CGST/ SGST is used for payment Output Tax in CGST/SGST and vice versa). However in most of the cases Taxable person makes both Inter state and Intra state Transactions and also cross utilizes ITC for payment of Taxes.

In case of cross utilization of ITC, Refund Application cannot be filled on GST Common Portal. Following error will be shown on Saving RFD 01A Application due to negative figures in one of the Tax Heads:

“ERROR: The calculated Value should be greater than Zero for form to get Saved/ Submitted”

Let’s see with the help of an example:

For Ex.: Interstate Purchase Rs 1000; GST Rate 28%; IGST Credit: Rs 280

Local Sale Rs 1500; GST Rate 12%; CGST Output: Rs 72, SGST Output: Rs 72

IGST Credit is used for payment of CGST and SGST Liability (Cross Utilization of ITC)

Unutilized ITC under IGST Head : 280-72-72= Rs 136 eligible for refund under Sec 54(3)

Now calculation of Maximum Amount of Refund as per the Common Portal is as under:

Computation of Refund to Be claimed (Statement 1) (Amount in Rs.)
Tax Head Turnover of inverted rated supply of goods Tax payable on such inverted rated supply of Goods Adjusted total turnover Net input tax Credit Maximum refund amount to be claimed

[(1×4÷3)-2]

0 1 2 3 4 5
IGST 0 280 280
CGST 1500 72 1500 0 (72)
SGST 72 0 (72)

As can be seen from ‘Statement 1’ Refund under the IGST Tax Head is coming Rs 280 as against the actual Unutilized Credit of only Rs 136. And Under the CGST and SGST Tax Head the refund amount is in negative. GST Common Portal accepts Refund Application only when all the Tax Heads have positive values. Following error will be shown on Saving RFD 01A Application due to negative figures in CGST and SGST:

“ERROR: The calculated Value should be greater than Zero for form to get Saved/ Submitted”

Thus as per the current defined process Refund of Inverted Duty Structure can be filled only if Taxable person doesn’t cross utilize ITC and is under Inverted Structure for both Inter State and Intra State transactions, which is definitely not the intention of the GST Law.

GST has removed erstwhile prevailing tax boundaries of States and made India a Single National Market. However, procedural issues like mentioned above are again forcing the assessee to operate from separate entities for within the State and outside the State transactions. 

SUGGESTED RESOLUTION

Government should clear its intentions on the above anomaly by:

– Providing the meaning of ‘Tax Payable on such inverted rated supply of goods’ as Output Tax Adjusted in the tax head for such Inverted Rated Supply of goods. The Above Statement 1 is reproduced below considering the suggestion:

Computation of Refund to Be claimed (Statement 1) (Amount in Rs.)
Tax Head Turnover of inverted rated supply of goods Tax payable on such inverted rated supply of Goods Adjusted total turnover Net input tax Credit Maximum refund amount to be claimed

[(1×4÷3)-2]

0 1 2 3 4 5
IGST 144 280 136
CGST 1500 0 1500 0 0
SGST 0 0 0

Author Bio

Qualification: CA in Practice
Company: N H Singhal & Associates
Location: Uttarakhand, IN
Member Since: 05 Mar 2018 | Total Posts: 3

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10 responses to “Unresolved Issues in GST Refund Application of Inverted Duty Structure”

  1. Virendra Chauhan says:

    How to get this % in inverted structure..
    (Accumulation of ITC (% of Turnover)*)

  2. Prateek Agarwal says:

    Have you updated this post ? If yes, then please let me know the link to it, as there has been massive changes made towards this issue off late.

  3. Rahul says:

    Local Sale Rs 1500; GST Rate 12%; CGST Output: Rs 72, SGST Output: Rs 72 ????????????????

  4. v madhavan says:

    Appreciate your suggestion to solution .Well explained.

  5. Kamlesh says:

    Inverted duty/ tax mean import duty higher than out put duty/ tax supply of goods domestic tariff area than filed refund

  6. mani n says:

    Hi, we are paying IGST when we are buying goods in bonded warehouse. Again we have to pay IGST while clearing from customs. So we are paying IGST twice on the same material. we are a trader and we end up having huge input credits. This is not an inverted structure. this is double taxation. please advice.

  7. Kiran Som says:

    Dear Heman sir,
    inline to above subject, i’m also facing problem while applying for Refund under GST. basically under service tax we were claim refund on Export of goods under Rule 41 of service tax i.e Expenses incurred for Export of goods. now same services we are availing in GST
    Since July Refund is pending due non support from GST office.
    highly appreciate if getting guidance from you.
    Thanx in Advance

  8. CHANDAN SINGH KARKI says:

    HELPFUL POST

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