Inverted Duty Structure Archives - Faceless Compliance

GST Taxpayers will get Refund of Inverted Duty on Input Services?

A a large number of petitions are pending in the various High Courts on the issue if there is Refund of Inverted Duty on Input Services in GST. Recently SC held on the issue of ‘ Validity of Refund of Inverted Duty on Input Services’ which SC do by posting the cases for final hearing on 28 April 2021

In VKC Footsteps India Pvt. Ltd. Vs. Union of India (Gujarat High Court) it was held that respondents are allow the claim of the refund made by the petitioners considering the unutilised input tax credit of “input services” as part of the “net input tax credit”(Net ITC) for the purpose of calculation of the refund of the claim as per Rule 89(5) of the CGST Rules,2017 for claiming refund under Sub-section 3 of Section 54 CGST Act,2017.

Recently a ruling has been passed by Madras High court in the case of Tvl. Transtonnelstroy Afcons Joint venture, wherein it has been held that 54(3)(ii) does not infringe Article 14 and thus refund of only inputs is available under inverted duty structure (“IDV”) (section 54(3)(ii). This judgement is in contrast to the judgement of Gujarat high court in case of VKC Footsteps

As the above two rulings of High Court are contradicting. It would be interesting to see the how to SC respond to this. Further if it is favorable to Taxpayers and they are entitled for refund, it would be interesting to see if CBIC and FM do not change the law retrospectively.

FULL TEXT OF THE SUPREME COURT ORDER

This batch of petitions arises from the judgments of the High Court of Gujarat and of the High Court of Madras. The Gujarat High Court has held that Explanation (a) to Rule 89(5) of the CGST Rules 2017 is ultra vires, while a contrary view has been taken by the High Court of Madras. Since a large number of petitions are pending in the High Courts on the same issue, it is appropriate that we list the present batch of cases at an early date, which we do by posting the cases for final hearing on 28 April 2021. The entire batch of petitions shall be listed at the top of the Board on that date.

In order to facilitate the learned counsel and the Court in appreciating the gamut of the matter, certain house-keeping directions are required, which are issued as follows:

(i) Counter affidavits, if any, shall be filed within a period of two weeks from today and no adjournment shall be granted on the next date of hearing;

(ii) Mr Balbir Singh, learned Additional Solicitor General shall, within a period of ten days, circulate an index of statutory provisions as well as circulars on which the Revenue would seek to place reliance at the final hearing. Within three days of the receipt of the e-mails, all the learned counsel shall indicate to the Additional Solicitor General the additions which they request to be made to the index so that a common compilation can be filed;

(iii) As regards case law and precedent, it has been agreed that Mr Sujit Ghosh, learned senior counsel appearing on behalf of the first respondent in some of the cases, shall likewise circulate an index of the case law on which he seeks to place reliance. All the learned counsel who wish to make any additions to the case law shall indicate this to Mr Sujit Ghosh within three days of the receipt of the emails;

(iv) In the above manner, two separate common compilations shall be made available to the Court in the soft form, one containing the statutory provisions and circulars and material associated with it and the second consisting of the precedent on the subject; and

(v) Written submissions shall be filed by all the learned counsel appearing on behalf of the contesting parties at least two weeks before the date of hearing.

The Registry shall ensure that the PDF format together with consecutive pagination is circulated to all the learned counsel appearing in the matter so as to ensure that the page references which are made available to the Court are also made available to all the learned members of the Bar for facilitating their submissions.

In the event that there is any difficulty experienced by the learned counsel in accessing the PDF files, they may contact the Court Masters of this Court, Mr Sanjay Kumar or Mr Chetan Kumar, as the case may be.

List the Special Leave Petitions on 28 April 2021 at the top of the Board.

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?

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

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

Refund is only available for the inputs of goods. Refund is not available for input services and capital goods.
Net ITC includes ITC of all inputs whether or not directly consumed in the manufacturing process.
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.
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,

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.
Turnover of inverted rated supply of goods means the value of the inverted supply of goods made during the relevant period.
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.
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.
Relevant period means the period for which the claim has been filed.

Let us understand the above formula with an example:

Inward Supplies:-

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
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
Net ITC = Rs 42,000 (24000 + 18000)

Outward Supplies:-

Sale Value of Finished Good X = Rs 3,00,000 (Turnover of inverted rated supply)
GST @5% = Rs 15,000
Sale Value of Finished Good Y = Rs 2,00,000 GST @18% = Rs 36,000
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 ?

Application for refund shall be filed on a monthly basis in form RFD-01A.
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.
RFD-01A has to be filled within two years from the end of financial years in which such claim of refund arises.
Refund application may be filed for one calendar month/quarter by clubbing successive calendar months/quarters.
However, it cannot be clubbed between months/quarters of different financial years.