Know all about Inverted Duty Structure under GST

Introduction

Inverted duty structure basically occurs when the tax chargeable on inputs is higher than the tax chargeable on outputs.

For instance, Mr A is in the manufacturer of air conditioners. He pays GST of Rs 1,00,000 on purchase of raw materials at 18%. After carrying out the manufacturing process, the finished product (air conditioner) is sold. Tax payable on the same is Rs 80,000 which is chargeable at 12%. Mr A is paying more GST on the input materials than the GST which is chargeable on the final product. This is a situation of inverted duty structure.

What is the unutilised input tax credit w.r.t Inverted Duty Structure?

“Input Tax” in relation to a taxable person, means the GST charged on him for any supply of goods and/or services to him, which are used or are intended to be used, for the furtherance of his business.

In simple words, input tax credit (ITC) means at the time of paying tax on output, you can reduce the tax you have already paid on inputs and pay the balance amount.

Now in a situation of ‘Inverted Duty Structure’ the GST paid on inputs exceeds the GST on the outputs which leads to unutilised ITC (Rs 20,000 in the above example). As per Section 54(3) of the CGST Act, 2017, a registered person may claim a refund of the unutilized input tax credit on account of Inverted Duty Structure at the end of any tax period.

An existing legitimate example of Inverted Duty Structure is the non-woven fabric bags industry. The inputs being non-woven fabric is being charged at 12% GST while the output of fabric bags is being charged at 5% GST.

What are the cases where refund of unutilised ITC will not be allowed?

1. Goods are exported out of India and are subject to export duty
2. Supplier of goods, services or both avails drawback or claims a refund of IGST on such supplies
3. Supplier claims refund of output tax paid under IGST Act
4. Output supplies are nil rated or fully exempt supplies

Is refund available for all types of inputs under Inverted Duty Structure?

1. Refund is only available for the inputs of goods. Refund is not available for input services and capital goods.
2. Net ITC includes ITC of all inputs whether or not directly consumed in the manufacturing process.
3. ITC of GST paid on inputs shall be available to a registered person as long as he/she uses or intends to use such inputs for the purposes of his/her business.
4. Therefore, ITC on stores and spares, packing materials, materials purchased for machinery repairs, printing and stationery items are included in net ITC for calculation of refund.

What is the maximum refund available?

Maximum Refund Amount =

(Turnover of inverted rated supply of goods and services * Net input tax credit / Adjusted total turnover) – Tax payable on such inverted rated supply of goods and services

Where,

1. Net ITC shall mean ITC 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
2. Turnover of inverted rated supply of goods means the value of the inverted supply of goods made during the relevant period.
3. Tax payable on such inverted rated supply of goods means the tax payable on such inverted rated supply of goods under the same head, i.e. IGST, CGST, SGST.
4. Adjusted Total turnover means the turnover in a State or a Union territory, as defined under section 2(112) of CGST Act, excluding the value of exempt supplies other than inverted-rated supplies, during the relevant period.
5. Relevant period means the period for which the claim has been filed.

Let us understand the above formula with an example:

Inward Supplies:-

1. Purchase value of raw material A which is used for manufacture of Finished Good X which is taxed at 5% – Rs 2,00,000, GST @12% = Rs 24,000
2. Purchase value of raw material B which is used for manufacture of Finished Good Y which is taxed at 18% – Rs 1,00,000 GST @18% = Rs 18,000
3. Net ITC = Rs 42,000 (24000 + 18000)

Outward Supplies:-

1. Sale Value of Finished Good X = Rs 3,00,000 (Turnover of inverted rated supply)

   GST @5% = Rs 15,000

2. Sale Value of Finished Good Y = Rs 2,00,000 GST @18% = Rs 36,000
3. Total Turnover = Rs 5,00,000 (3 lakhs + 2 lakhs)

Maximum Refund

= (42000 * 3 lakhs / 5lakhs) – 15000= Rs 10,200

What is the time limit for application of refund under Inverted Duty ?

1. Application for refund shall be filed on a monthly basis in form RFD-01A.
2. If tax payers turnover is up to 1.5 crores and he has opted for a quarterly return, then he can file refund application on a quarterly basis.
3. RFD-01A has to be filled within two years from the end of financial years in which such claim of refund arises.
4. Refund application may be filed for one calendar month/quarter by clubbing successive calendar months/quarters.
5. However, it cannot be clubbed between months/quarters of different financial years.

What is the procedure for claiming refund under the Inverted Duty Structure?

GSTR-1 & GSTR-3B has to be filed for the tax period for which a tax payer wants to apply for Refund of accumulated ITC.

The refund application must be filed in prescribed form RFD-01A.

Steps: