Inverted Duty Refund under GST | A Comprehensive Guide

Table of Contents

1. Refunds under GST
2. Where Does Inverted Duty Refundarise
3. Legal Provisions for Claiming Inverted Duty Refund
4. Procedure for Filing Inverted Duty Refund
5. Various Forms Used in Inverted Duty Refund
6. Issues for Claiming the Inverted Duty Refund

1. Refunds under GST

Refunds under GST are of the below kinds:

1. 1. Export of goods under LUT (Letter of undertaking)
   2. Export of goods on payment of IGST under the claim of rebate
   3. Inverted duty refund
   4. Other claims

Sec 54(3) of CGST Act, 2017 states:

(a) Zero rated supplies made without payment of tax;

(b) where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies (other than 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

2. Where Does Inverted Duty Refundarise

The term ‘Inverted Tax Structure‘ refers to a situation where the rate of tax on inputs purchased is more than the rate of tax on outward supplies. That means Inverted Duty Structure arises when tax paid on Inward Supplies is higher than tax payable on outward supplies.

(a) trader purchasing goods i.e., LPG gas at the rate of 18% and selling the same at 5% to domestic customers.

(b) Supply of information technology products by an IT Company to Government Departments, PSUs, and to other Research and Educational Institutes. In these instances, 18% GST is levied at the time of procurement from the Distributors and/or Original Equipment Manufacturers. When such goods are supplied to specified institutions (mentioned above) 5% GST is levied. However, the same goods, when supplied to other users attract 18% GST. In this case, to the extent of supplies to specified end users for which a concessional rate has been prescribed, there is accumulation of input tax credit on account of an inverted duty structure.

(c) A composite supply wherein the output is at a lower rate than the goods/services forming part of such composite supply

(d) Goods exported on payment of IGST under the claim of rebate, wherein the IGST rate is lower than the GST rate applicable

to the goods/services forming part of such exported supply

(e) Accumulation of ITC due to rate change

(f) It is available even when the input and output tax rates are the same, but there is accumulation of ITC for any other reasons.

(g) Where supply has been made to merchant exporters under Notification  40/2017- Central Tax (Rate) dated 23.10.2017 or Notification No. 41/2017-Integrated Tax (Rate) dated 23.10.2017 or both.

3. Legal Provisions for Claiming Inverted Duty Refund

Sec 54 contains the provisions for refund of tax.

It provides for a time period of two years from the relevant date. The relevant date for inverted duty refund would be the

date of payment of tax as all other conditions of relevant date defined under this section are not relevant.

No refund of unutilised input tax credit shall be allowed in cases other than-

• • zero rated supplies made without payment of tax;
  • where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies(other than 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:
  • Provided further that no refund of unutilised input tax credit shall be allowed in cases where the goods exported out of India are subjected to export duty:
  • Provided also that no refund of input tax credit shall be allowed, if the supplier of goods or services or both avails of drawback in respect of central tax or claims refund of the integrated tax paid on such supplies.
  • In case of construction services as per Notfn 15/17-CT(Rate) 28.06.2017
  • In case of certain notified goods as per Notfn 5/17-CT (Rate) 28.06.2017 as amended by Notfn 44/2017-CT(Rate) dt.14.11.2017, refund of unutlized ITC would not be eligible. Examples-

If the refund is not granted within sixty days of receipt of application for refund, an interest of not exceeding six percent per annum needs to be paid as provided under Sec 56. Subject to the conditions of Rule 91, provisional refund has to be granted within seven days of acknowledging the claim in FORM GST RFD-02

4. Procedure for Filing Inverted Duty Refund

Rule 89 specifies the document for filing of inverted duty refund to be FORM GST RFD-01A. It should be filed online on the GSTN portal. The claim is to be filed on monthly basis. But in case of assesses, who have opted to file GSTR-1 on quarterly basis as per Notfn 71/2017-Central Tax dated 29.12.2017 can file on quarterly basis.

The prescribed statements – Statement 1 and Statement 1A of FORM GST RFD-01A have to be filled. Drawback of all taxes under GST (Central Tax, Integrated Tax, State/ Union Territory Tax) should not have been availed while claiming refund of accumulated ITC under section 54(3)(ii)  of the CGST Act, 2017. A declaration to this effect forms part of FORM GST RFD-01A as well.

Under Rule 89 (5) refund of input tax credit shall be granted for inverted duty cases as per the following formula:-

Maximum Refund Amount = {(Turnover of inverted rated supply of goods and services) x Net ITC Adjusted Total Turnover} – [{tax payable on such inverted rated supply of goods and services x (Net ITC ÷ ITC availed on inputs and input services)}].

Explanation: – For the purposes of this sub-rule, the expressions –

(a)  “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; and 9 [“Adjusted Total turnover” and “relevant period” shall have the same meaning as assigned to them in sub-rule (4).

The above was substituted w.e.f. 01.07.2017 vide Notification No. 26/2018-CT dated 13.06.2017 for “(5) In the case of refund on account of inverted duty structure, refund of input tax credit shall be granted as per the following formula – Maximum Refund Amount = {(Turnover of inverted rated supply of goods) x Net ITC Adjusted Total Turnover} – taxpayable on such inverted rated supply of goods

Explanation.- For the purposes of this sub rule, the expressions “Net ITC” and “Adjusted Total turnover” shall have the same meanings as assigned to them in sub-rule (4).”

Substituted by Notification No. 14/2022 – CT, dated 05.07.2022 For “taxpayable on such inverted rated supply of goods and services

4.1 Relevant Legal Provisions for Inverted Duty Refund Under GST

1. 1. Sec 54(4): Documents required to be accompanied
   2. Sec 54(5): Order for Refund and credited to the Fund referred to in section 57
   3. Sec 54(7): Order for Refund as per section
   4. Sec 54(5): within 60 days from the date of receipt of application
   5. Sec 54(8)(b): Refundable amount shall be paid to the applicant
   6. Sec 54(10): Withholding the refund in certain cases
   7. Rule 89(1): Refund application Form and FORM GST RFD-01
   8. Rule 89(2): Documents to be attached with application
   9. Rule 89(3): Electronic credit ledger shall be debited by the applicant by an amount equal to refund claimed
   10. Rule 89(4): and 89(5) Refund Calculation
   11. Rule 90(2): Acknowledgement in FORM GST RFD-02 within 15days of filing the complete application
   12. Rule 90(3): Deficiencies if any will be communicated in FORM GST RFD-03
   13. Rule 92 (1): Officer shall pass an order in FORM GST RFD-06 within 60days of receipt of the complete application

5. Various Forms Used in Inverted Duty Refund

1. 1. FORM GST RFD-01: Application for Refund
   2. FORM GST RFD-02: Acknowledgment for filing of refund claim
   3. FORM GST RFD-03: Deficiency memo in the claim of refund
   4. FORM GST RFD-04: Provisional sanction of refund
   5. FORM GST RFD-05: Payment order of refund
   6. FORM GST RFD-06: Final refund sanction order
   7. FORM GST RFD-07: Refund with hold order
   8. FORM GST RFD-08: Show cause notice on refund
   9. FORM GST RFD-09: Reply to the SCN on refund
   10. FORM GST RFD-01W: Withdrawal of refund application
   11. FORM GST PMT-03: Order re-crediting the refund to the electronic credit ledger

6. Issues for Claiming the Inverted Duty Refund

Circular No. 135/05/2020-GST dated 31.03.2020 restricts refund of Inverted Duty Structure in cases, where Inputs and Outputs Supplies are same.

6.1 Refund of Accumulated Input Tax Credit (ITC) On Account of Reduction in GST Rate

• • It has been brought to the notice of the Board that some of the applicants are seeking refund of unutilized ITC on account of inverted duty structure where the inversion is due to change in the GST rate on the same goods. This can be explained through an illustration. An applicant trading in goods has purchased, say goods “X” attracting 18% However, subsequently, the rate of GST on “X” has been reduced to, say 12%. It is being claimed that accumulation of ITC in such a case is also covered as accumulation on account of inverted duty structure and such applicants have sought refund of accumulatedITC under clause (ii) of sub-section (3) of section 54 of the CGST Act.
  • It may be noted that refund of accumulated ITC in terms clause (ii) of sub-section (3) of section 54 of the CGST Act is available where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies. It is noteworthy that, the input and output being the same in such cases, though attracting different tax rates at different points in time, do not get covered under the provisions of clause (ii) of sub-section (3) of section 54 of the CGST It is hereby clarified that refund of accumulated ITC under clause (ii) of sub-section (3) of section 54 of the CGST Act would not be applicable in cases where the input and the output supplies are thesame.

The Circular has been issued in terms of the powers provided in Section 168 of the CGST Act. The said Section provides the powers to issue orders, instructions, etc. for the purpose of ensuring uniformity in the implementation of the Act. Thus, under the guise of Section 168, which is essentially for ensuring efficient implementation of the Act, the Circular cannot impose conditions which are not provided in the Act itself.

The Hon’ble High Court of Gauhati in the case of BMG Informatics Private Limited vs. Union of India [2021] 130 taxmann.com 182 /88 GST 368 (Gau.) and the Hon’ble Calcutta High Court in the case of Shivaco Associates vs. Joint Commissioner [2022] 137 taxmann.com 213/ 59 GSTL 389/91 GST 976 (Cal.) have taken a view in favour of the assessee basis the above. The Courts observed that the legislature was mindful of the fact that there may be instances where the input and output supplies are same and consciously, did not create any dichotomy for allowing refund in such cases. Such interpretation which makes the main provision / Act redundant and otiose should be discarded. In yet another case, the Hon’ble Rajasthan High Court in the case of Baker Hughes Asia Pacific Ltd vs UOI & Ors (TS-338-HC(RAJ)-2022-GST] – Rajasthan High Court), also held that refund should be available considering the clear language of the provisions.

As a result, CBIC has amended the Circular by issuance of Circular No. 173/05-2022-GST dated 06th July, 2022 and the revised para reads as under:

• • It may be noted that refund of accumulated ITC in terms of clause (ii) of first proviso to sub-section (3) of section 54 of the CGST Act is available where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies. It is noteworthy that, the input and output being the same in such cases, though attracting different tax rates at different points in time, do not get covered under the provisions of clause (ii) of the first proviso to sub-section (3) of section 54 of the CGST Act. 3.3 There may however, be cases where though inputs and output goods are same but the output supplies are made under a concessional notification due to which the rate of tax on output supplies is less than the rate of tax on inputs. In such cases, as the rate of tax of output supply is less than the rate of tax on inputs at the same point of time due to supply of goods by the supplier under such concessional notification, the credit accumulated on account of the same is admissible for refund under the provisions of clause (ii) of the first proviso to sub-section (3) of section 54 of the CGST Act, other than the cases where output supply is either Nil rated or fully exempted, and also provided that supply of such goods or services are not notified by the Government for their exclusion from refund of accumulated ITC under the said clause.

Thus inverted duty refund would be available in all cases, where the input and output may be the same but the taxes applicable threon are different due to change in the tax rate or issuance of concessional rate of tax in certain cases and the output is not NIL rated or fully exempted supply nor under exclusion for claiming refund.

Notification no. 26/2018 made changes in Rule 89(5) with retrospective effect from 1st July 2017 and allowed refund only for the inputs of goods. Input doesn’t include input services and capital goods for this purpose. As per circular no. 79/53/2018- GST, Net ITC includes ITC of all inputs whether or not used directly consumed in the manufacturing process. An input tax credit of the 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 and there is no specific restriction on the availment of such ITC under section 17(5) of CGST Act. And thus ITC on stores and spares, packing materials, materials purchased for machinery repairs, printing and stationery items are thus included in Net ITC for calculation of refund. This has been litigated in various forums. Madras HC in the matter of Tvl. Transtonnelstroy Afcons JV Vs UOI and the Gujarat HC in the matter of UOI Vs VKC Footsteps India Pvt Ltd [2021] 130 taxmann.com 193/52 GSTL 513 (SC) has given divergent decisions. Finally Supreme Court has ruled on this matter by upholding the decision of the Madras HC to the extent of restricting the input credit to input goods and not extending the same to cover the capital goods and directed the Government to review the formula which restricts the input services. Accordingly the CBIC has revised the formula to allow the refund of input services also vide Notfn 14/2022 – CT, dated 05.07.2022. Hence it is to be noted that inverted duty refund is not permitted in case of ITC accumulation on Capital goods.