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Inverted Duty Structure under GST

By Annapoorna

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Updated on: Mar 28th, 2024

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8 min read

Inverted tax structure simply refers to a condition where the tax rate on inputs used is higher than the tax rate on the outputs for sale. The condition may not be prevalent for all industries. The article throws light on the concept and compliance involved.

Inverted tax structure in the pre-GST regime

In the pre-GST regime, a situation of an 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:

ProductsImport duty on
Finished GoodsRaw MaterialsFinished GoodsRaw Materials
Solar ModulesComponents for Solar ModulesNil5-10%
SeaweedAgar10%30%
Dehydrated culture mediaMicroorganism10%30%
Electrical TransformerSteel Tubes7.50%10%
Railway locomotivesComponents5%18-28%

Inverted tax structure under 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).

ProductsGST on
Finished Goods (Output)Raw Materials (Input)Finished GoodsRaw Materials
Fabric BagNon-Woven Fabric5%12%

Refund in case of inverted tax structure under GST

A registered person may claim a refund of unutilised Input Tax Credit (ITC). The ITC on account of inverted tax structure can be claimed at the end of any tax period where the credit has accumulated on account of the rate of tax on inputs being higher than the rate of tax on output supplies. A tax period is a period for which a return is required to be furnished.

Exceptions where the refund of the unutilised input tax credit cannot be claimed, are as follows:

  • Output supplies are nil rated or fully exempt supplies except for supplies of goods or services or both as may be notified by the Government on the recommendations of the GST Council.
  • If the goods exported out of India are subject to export duty.
  • If supplier claims refund of output tax paid under IGST Act.
  • If the supplier avails duty drawback or refund of IGST on such supplies.

Formula for maximum refund under inverted tax structure

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 

Illustration: 
Supply of Fabric Bags (Output) Value: Rs.1,400 
GST on the above: 1400×5%= Rs.70 

Supply of Woven fabric of Silk: Value Rs.1,500 
GST on the above: Rs.1,500×5%=Rs.75 

The purchase value of Silk yarn: Rs.1,000×5% 
GST on the above: Rs.1,000×5%=50 

Purchase Value of Non woven fabric Rs.1,000
GST on the above: Rs.1,000×12%=Rs.120. 
Turnover of inverted rated supply which in this case is Rs.1,400. 

Maximum 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.1,400

b. 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

c. 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 RCM supplies)
  • Exempt supplies made within a state or union territory by a taxable person
  • Exports of goods or services or both
  • Inter-state supplies of goods or services or both made from the state or union territory

However, it excludes central tax, state tax, union territory tax, integrated tax and cess.

d. 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

e. Relevant period

The period for which the claim has been filed.

How to claim refund of unutilised ITC?

a. Prerequisites for claiming refund of unutilised ITC 

GSTR-1 and GSTR-3B have to be filed for the relevant tax period for which you want to file a refund application of the accumulated ITC.

b. Which form to be filed for claiming refund of unutilised ITC

RFD-01

Note: RFD-01 is the application through an online facility enabled for claims of refund.

c. Time limit to file

RFD-01 has to be filed within two years from the end of the financial year in which such claim for refund arises.

d. Step-by-step process to file refund of unutilised ITC

Step 1: Fill and file RFD-01 on GST Portal. ARN will be generated by the GST Portal.

Step 2: Print the filed application and the Refund application ARN Receipt generated available on the portal.

Step 3: Submit the printed documents with relevant supporting documentation to the jurisdictional authority.

Step 4: A tax official will process the refund application. Once the application is processed, a refund will be disbursed manually.

Step 5: Contact the Nodal officer of the corresponding state/centre in the case where the jurisdictional authority of the state/centre is not yet allotted.

How to 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 and contentions

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

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

  • 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 the 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 a higher GST rate than output supplies.

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

About the Author

I preach the words, “Learning never exhausts the mind.” An aspiring CA and a passionate content writer having 4+ years of hands-on experience in deciphering jargon in Indian GST, Income Tax, off late also into the much larger Indian finance ecosystem, I love curating content in various forms to the interest of tax professionals, and enterprises, both big and small. While not writing, you can catch me singing Shāstriya Sangeetha and tuning my violin ;). Read more

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Quick Summary

Inverted tax structure refers to a situation where the tax rate on inputs is higher than on outputs. The GST regime has rules for claiming refunds in such cases. Compliance issues and a formula for maximum refund are explained. Questions: 1. How to claim a refund for unutilised ITC under an inverted tax structure? 2. What are the exceptions for claiming refunds? 3. What is the formula for calculating the maximum refund amount?

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