Inverted Duty Structure under GST: The Inverted Duty Structure does not find definition under the GST Act but is meant to classify a situation wherein an entity is liable to pay a higher rate of GST or import duties on the products procured as inputs to the manufacturing process than on the final output that results from the said process.
- Introducing The Concept Of ‘Inverted Duty Structure Under GST
- How Does a GST refund work in the case of an inverted duty structure?
- For Which Inputs Are Refunds Allowed?
- How Is The Maximum Refund Available Calculated?
- How Can A Refund Be Claimed?
- When Is A Refund Application Filed?
The use of the term ‘Inverted Tax Structure’ is made to signify a situation wherein the tax rate levied on inputs purchased or the rate of GST paid on received inputs stands to be more than the tax rate imposed on the rate of GST payable on outward supplies.
Say, for example, a company XY that operates as an inverter manufacturing company purchases input raw materials at 18%, and the GST paid on which is Rs. 1,00,000. The GST rate applicable on the final product, i.e. the inverter, is 12%, concluding to the GST payable as Rs. 65,000. In this scenario, XY has to pay more GST on the inputs used in the manufacturing process of the inverter than on the final output product.
In the case of an inverted duty structure, a refund is allowed but stands subject to certain specific conditions. The person registered as a taxpayer must apply for the refund he wishes to claim, the procedure for which shall be explained later in the article.
At the end of a tax period, i.e. a period that requires furnishing of a return, any registered person is allowed the claim of unutilized ITC (input tax credit). This stands based on Inverted Duty Structure, wherein the tax rate on inputs is higher than the tax rate on Outputs & Output services, in compliance with Section 54(3) of the CGST Act, 2017.
Unutilized input tax credit refund is not allowed when:
- Fully exempt supplies or nil-rated output supplies.
- Goods exported from India that are subject to export duty.
- When suppliers of goods or services or both claim refunds of IGST or avail of drawback following central tax.
- In the instance of supply of construction services, unutilized input tax credit refund stands unallowed under sub-section (3) of section 54 of Central Goods and Services Tax Act, as via Vide notification No. 15/2017.
- Following vide notification no. 5/2017-Central Tax (Rate) [the tariff item, heading, subheading or chapter is mentioned in the parenthesis succeeding the description of goods]:
- Silk or silk waste woven fabrics. (5007)
- Wool or animal hair woven fabrics. (5111 to 5113)
- Cotton woven fabrics. (5208 to 5212)
- Other vegetable textile fibers, paper yarn woven fabrics. (5309 to 5311)
- Man-Made textile materials woven fabrics. (5407,508)
- Man-made staple fibers woven fabrics. (5512 to 5516)
- Knitted or crocheted fabrics [All goods]. (60)
- Any rail locomotives powered by electric accumulators or external sources of electricity. (8601)
- Other rail locomotives and locomotive tenders. For example- Diesel-electric locomotives, Steam locomotives and tenders thereof. (8602)
- Any self-propelled railway or tramway coaches, vans and trucks, excluding those of heading 8604 (8603)
- Railway or tramway maintenance or service vehicles, self-propelled or otherwise. These may include workshops, cranes, ballast tampers, trackliners, testing coaches and track inspection vehicles. (8604)
- Non-self- propelling railway or tramway passenger coaches, luggage vans, post office coaches and other particular purpose railway or tramway coaches, excluding those of heading 8604 (8605)
- Non-self-propelling railway or tramway goods vans and wagons. (8606)
- Railway or tramway locomotives or rolling-stock parts; comprising bogies, Bissel-bogies, axles and wheels, and parts thereof. (8607)
- Fixtures and fittings of railway or tramway tracks; mechanical (including electro-mechanical) signalling, railways, tramways, roads, inland waterways safety and traffic control equipment, parking facilities, port installations or airfields; parts of the preceding. (8608)
Claiming unutilized input tax credit refund is allowed from 1st August 2018 on the accumulated input tax credit due to inverted duty structure. This is only for supplies of goods mentioned in (a.), (b.), (c.), (d.), (e.), (f.), and (g.).
The unutilized input tax credit that has been accumulated on inward supplies regarding the goods mentioned above till 31st July 2018 shall lapse. This initiative by the government is an undertaking to allow for the claiming of input tax credit returns accumulated due to an inverted duty structure to the textile industry.
In accordance with notification no. 26/2018, retrospective effects come into play from 1st July 2017 due to Rule 89(5) changes to allow refund only for goods inputs. Such inputs, for the stated purpose, are non-inclusive of capital goods and input services.
Net ITC comprises all inputs directly or indirectly consumed in the manufacturing process stated by circular no. 79/53/2018- GST. As long as a registered individual intends to use the inputs for the intentions of his/her business, the input tax credit of the GST that is paid on the stated inputs shall remain available.
Section 17(5) of the CGST Act levies no restrictions on availing such input tax credit. Thus, input tax credit on materials used for packing and purchased to repair machinery, printing and stationery items, and stores and spares find inclusion in Net ITC to calculate the refund.
The maximum refund available is calculated according to a particular formula, which is mentioned as follows:
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.
The components of the given formula can be explained in the following manner:
Net input tax is taken to mean any ITC availed on inputs other than the one whose refund is claimed under the sub-rules of (4A) or (4B) or both during the pertinent tax period.
Turnover of inverted rated supply of goods and services refers to the inverted supply of goods value incurred during the pertinent period.
Adjusted total turnover refers to Clause (112) of section 2 of the CGST Act defined turnover in a State or a Union territory during the pertinent period. This shall exclude exempt supplies’ values except for inverted-rated supplies.
Tax payable on such an inverted rated supply of goods is used to define the taxes paid on inverted rated goods supply belonging to the same head: IGST, CGST, SGST.
Relevant period refers to the time for which the claim is filed.
This may be illustrated through the use of an example, for which we are to consider the following-
Details of Inward Supplies
- Inward supplies used for manufacturing goods which are taxed at 5%, having a value of Rs. 200 lakhs at GST of 12% and GST (ITC) of Rs. 24 lakhs.
- Inward supplies used for manufacturing goods which are taxed at 18%, having a value of Rs. 150 lakhs at GST of 18% and GST (ITC) of Rs. 27 lakhs.
- Therefore, the total input tax credit of GST (ITC) comes to Rs. 51 lakhs.
Details of Outward Supplies
- Turnover of inverted rated supply, which is taxed at 5%, having a value of 300 lakhs at GST of 5% and GST (Liability) of Rs. 15 lakhs.
- Turnover of inverted rated supply, which is taxed at 18%, having a value of Rs. 200 lakhs at GST of 18% and GST (Liability) of Rs. 36 lakhs.
- Total turnover having the value of Rs. 500 lakhs and GST (Liability) of Rs. 51 lakhs.
The Net input tax credit will thus stand at Rs. 51 lakhs, inverted turnover at Rs. 300 lakhs and total adjusted turnover at Rs. 500 lakhs. Therefore, applying the above-stated formula:
Maximum available refund = (300 x 51/500) – 15
= Rs. 15.60 lakhs
Should a person who is registered as a taxpayer want to apply for a refund of the accumulated input tax credit, he/she will have to file GSTR-1 and GSTR-3B for the relevant time period.
The application for a refund of the accumulated input tax credit is to be filed in the prescribed format RFD-01A, which is temporarily being used instead of RFD-01.
The following steps are to be followed:
- RFD-01A form to be filed on GST portal, which will generate an ARN.
- Collect printouts of the RFD-01A application form and the generated ARN.
- The printouts are to be submitted to the jurisdictional authority with relevant supporting documentation.
- The refund application will be processed by the tax officer, following which there will be manual disbursement of the refund.
- Should the jurisdiction authority of the state or centre not be allotted, the taxpayer is to approach the Nodal officer of the respective state/ central.
Form RFD-01A is to be filed every month. If a taxpayer with a turnover of up to 1.5 crores has opted for a quarterly return, the taxpayer must file the claim quarterly. RFD-10A requires filing within two years of the end of the financial year during which the refund claim arises.
For refund applications for export, applications may be filed for one calendar month or quarter by clubbing together successive calendar months or quarters, as following circular no. 37/11/2018. Months or quarters of different financial years cannot be clubbed together. For an inverted duty structure, these same provisions will apply.