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Inverted Tax Structure in the pre-GST regime

In the pre-GST regime, a situation of Inverted duty structure arose in cases where import duty on raw materials that were used in the production of finished goods was higher than the import duty on finished goods itself. An example which shows a case of Inverted Duty Structure : Duty on the import of tyres (Finished Good) = 10% Duty on the imports of natural rubber (Raw Material) = 20% Other Examples:
Products Import duty on
Finished Goods Raw Materials Finished Goods Raw Materials
Solar Modules Components for Solar Modules Nil 5-10%
Seaweed Agar 10% 30%
Dehydrated culture media Microorganism 10% 30%
Electrical Transformer Steel Tubes 7.5% 10%
Railway locomotives Components 5% 18-28%

Inverted Tax Structure in the GST regime

The term ‘Inverted Tax Structure’ refers to a situation where the rate of tax on inputs purchased (i.e.GST rate paid on inputs received) is more than the rate of tax on outward supplies (i.e. GST rate payable on sales).
Products GST  on
Finished Goods (Output) Raw Materials (Input) Finished Goods Raw Materials
Fabric Bag Non-Woven Fabric 5% 12%

Refund in case of Inverted Tax Structure under GST

A registered person may claim a refund of unutilised ITC on account of inverted tax structure at the end of any tax period where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies. Exceptions where refund of unutilised input tax credit shall not be allowed in these cases
  1. Output supplies are 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.
  1. If the goods exported out of India are subject to export duty.
  1. If supplier claims refund of output tax paid under IGST Act.
  1. If the supplier avails duty drawback or refund of IGST on such supplies.
Tax period: A tax period is a period for which return is required to be furnished.  

Maximum Amount of Refund: Formula and Terms

Maximum Refund Amount = (Turnover of inverted rated supply of goods and services X Net input tax credit / Adjusted total turnover) – Tax payable on such inverted rated supply of goods and services Example: Supply of Fabric Bags (Output). Value: Rs.1400. GST on the above: 1400×5%= Rs.70. Supply of Woven fabric of Silk: Value 1500 GST on the above: 1500×5%=Rs.75 Purchase value of Silk yarn: 1000×5% GST on the above: 1000×5%=50 Purchase Value of Non woven fabric Rs.1000. GST on the above: 1000×12%=Rs.120. Turnover of inverted rated supply in this case = Rs.1400 Now, Max. Refund = {(1400×120)/1400}-70 = Rs.50

Various Terms used in the Computation of Maximum Refund Amount

a. Turnover of inverted rated supply of goods:
The value of inverted supply of goods or services made during the relevant period without payment of tax under bond or letter of undertaking. In the above example, turnover of inverted rated supply of goods = Rs.1400
c. Net input tax credit 
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. In the above example,  it is 50+120-50=Rs. 120
d. Adjusted Total Turnover
“Adjusted Total turnover” means the turnover in a State or a Union territory, as defined under sub-section (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. In the above example,  it is 1500+1400-1500 = Rs. 1400 Turnover in a State or a Union territory, as defined under sub-section (112) of section 2: “Turnover in State” or “turnover in Union territory” means the aggregate value of all taxable supplies (excluding the value of inward supplies on which tax is payable by a person on reverse charge basis) and exempt supplies made within a State or Union territory by a taxable person, exports of goods or services or both and inter-State supplies of goods or services or both made from the State or Union territory by the said taxable person but excludes central tax, State tax, Union territory tax, integrated tax and cess.
e. Tax payable on such inverted rated supply of goods
The tax amount payable on such inverted rated supply of goods under the same head i.e. IGST, CGST, SGST. In the above example,  it is 1400×5%=Rs.70
f. Relevant period
The period for which the claim has been filed.

5. How to claim Refund of ITC unutilised

a. Pre-requisites: GSTR-1 and GSTR-3B has to be filed for the relevant tax period for which you want to file refund application of the accumulated ITC.
b. Form to be filed:  RFD-01
NOTE: RFD-01 is the application through online facility enabled for claims of refund.
c. Time limit to file:
RFD-01 has to be filed within 2 years from the end of financial year in which such claim for refund arises.

Steps:

  1. Fill and file RFD-01 on GST Portal. ARN will be generated by the GST Portal.
  2. Print the filed application and the Refund application ARN Receipt generated available on the portal.
  3. Submit the printed documents with relevant supporting documentation to the jurisdictional authority.
  4. Tax official will process the Refund Application. Once the application is processed, refund will be disbursed manually.
  5. Contact the Nodal officer of the corresponding state/ center in case where the jurisdictional authority of state/ center is not yet allotted.

Track the filed refund application

  • Download PDFs of the Filed applications (ARNs) using the My Saved / Submitted Applications option under Refunds.
  • Track the status of the Filed applications using the Track Application Status option under Refunds.

Issues / Contentions

  1. A manufacturing industry may have multiple number of inputs with variable tax rates. Some having lower rate than output, some having the same rate as output, some in the nature of inverted duty structure.

In this case, it is very difficult to correlate the output with inputs. Hence this results in inaccurate computation of refund amount.

  1. Whether the refund of accumulated credit on account of inverted duty structure is available only for those inputs where the rate of GST is higher than the outward supplies or for all  inputs?

As per the explanation to the formula for computation of the amount of refund,

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.

From the above, it is important to note that it does not specifically mention inputs having higher GST rate than output supplies.

Therefore, for the purpose of calculating refund claim on account of inverted duty structure,  entire credit of inputs can be considered.

 
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