Explore the concept of Inverted Duty Structure on the Textile Industry under GST. Learn about the government’s efforts to rectify the situation, its impact on manufacturers, and the process of claiming GST refund for Inverted Tax Structure. Get insights into the required forms and steps involved in filing a refund application, along with the formula for calculating the refund amount. Understand how addressing Inverted Duty Structure contributes to a favorable business environment, encourages investment, and promotes the growth of the Textile Industry in India.
The Inverted Duty Structure refers to a situation where the tax rate imposed on inputs or inward supply is higher than the tax rate on the output or outward supply for sale. Typically, in a tax system, lower rates of tax are applied to inputs, such as raw materials, and higher rates are levied on the final product or output.
The government is likely to address the issue of Inverted Duty Structure in the Textile Industry. This industry faces a scenario where the tax rate on the purchase of raw materials is higher than the tax rate on the final product. To illustrate this, let’s consider a manufacturer who purchases fabric, which is a raw material for producing T-shirts. In this case, the fabric is subject to a Goods and Services Tax (GST) of 12%, while the finished product (T-shirt) is taxed at a lower rate of 5% GST.
The government recognizes the significance of the Textile Industry, considering it as the second-largest employer in the country, following the agriculture sector. Understanding the industry’s contribution to employment generation and economic growth, the government aims to rectify the Inverted Duty Structure to support the growth and competitiveness of the Textile Industry.
By addressing the Inverted Duty Structure, the government intends to implement a tax system that aligns with the industry’s needs and promotes its development. This may involve revising the tax rates to ensure that the tax imposed on inputs is lower than that on the final product, thereby reducing the tax burden on manufacturers and improving their competitiveness.
The government’s objective is to create a favorable business environment for the Textile Industry, encouraging investment, fostering innovation, and boosting job creation. By rectifying the Inverted Duty Structure, the government aims to promote the growth of the industry, enhance its global competitiveness, and ultimately contribute to the overall economic development of the country.
Moreover, Industrialist can claim GST refund due to Inverted Duty Structure by following some steps. These are:
- Step 1: Login to the GST portal, go to “services” >, “Refunds” >, “Application for Refund”.
- Step 2: Select the refund type and choose whether or not to file NIL refund application. Select the refund type as “Refund on account of ITC accumulated due to Inverted Tax Structure”.
Various Documents are required to claim GST refund for Inverted Tax Structure. It includes 5 forms. These forms are:
1. FORM GST RFD-01: Application for Refund
FORM GST RFD-01 is the application form used by taxpayers to claim a refund of excess tax paid or any other refundable amount under the Goods and Services Tax (GST) system. Taxpayers need to provide details such as the type of refund claim, tax period, tax amount, and reasons for the refund claim. This form is submitted electronically on the GST portal.
2. FORM GST RFD-02: Acknowledgment for filing of refund claim
FORM GST RFD-02 is the acknowledgment form issued by the GST authorities upon successful submission of FORM GST RFD-01. It serves as proof that the refund claim has been filed and is under review by the tax authorities. The acknowledgment contains a unique reference number that can be used for future correspondence regarding the refund claim.
3. FORM GST RFD-03: Deficiency memo in the claim of refund
FORM GST RFD-03 is issued by the tax authorities if any deficiencies or discrepancies are found in the refund claim filed using FORM GST RFD-01. The deficiency memo lists the specific reasons and areas where the claim is incomplete or erroneous. Taxpayers are required to rectify the deficiencies and resubmit the refund claim accordingly.
4. FORM GST RFD-04: Provisional sanction of refund
FORM GST RFD-04 is issued by the tax authorities to provisionally sanction the refund claim after due verification and assessment. This form indicates that the tax authorities have approved the refund claim and intend to release the refund amount, subject to any subsequent adjustments or finalization of the claim.
5. FORM GST RFD-05: Payment order of refund
FORM GST RFD-05 is issued by the tax authorities to initiate the payment process for the sanctioned refund amount. It serves as an official order authorizing the refund payment and specifies the details of the amount to be refunded, the bank account to which it will be credited, and any other relevant information related to the payment.
These forms play a crucial role in the GST refund process, ensuring transparency and providing a structured framework for taxpayers to claim and receive refunds under the GST regime.
Formula for Refund under Inverted Duty Structure: In this case refund of input tax credit shall be granted as per the following formula:
Maximum Refund amount = {(Turnover of inverted rated supply of goods) * (Net ITC/ Adjusted Total Turnover)} – Tax payable on such inverted rated supply of goods.
Government has prescribed a time limit for sanctioning of refund. So, sanctioned time is within 60 days from the date of receipt of application complete in all respects.
One major drawback of Inverted Duty Structure is that, it increases with the increased use of imported raw methods. This system of Inverted Duty Structure discourages domestic value.
I hope you understand the condition on Textile Industry regarding Inverted Duty Structure. Feel free to ask your queries.
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Submitted by: Megha Gupta | Air 25 (CS FOUNDATION)
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