All you need to know about Refunds under Inverted Duty Structure

In comparison to the precursory taxation regime, GST majorly focuses on speedy processing and initiation of refunds. As a matter of fact, per GSTN reports as much as INR 17,000 crores have been refunded to the GST taxpayers till date with another INR 20,000 crores of refunds under process. The amount is sizeable, considering GST was implemented only a little over a year ago.

Refunds under the Inverted Duty Structure is a major aspect of GST, which in layman term is a situation where the rate of taxes on inputs used for providing outward supplies is greater than the rate of taxes charged on the corresponding outward supplies. For example, non-woven fabric is charged with GST @12% whereas, the bags manufactured with the same fabric are charged with GST @5%. Therefore, the taxpayer shall have no outward cash liability as he/she can utilize the Input Tax Credit (ITC) available to pay for the outward tax and still be left with unutilised ITC. Hence, the mechanism to refund this unutilised ITC is basically the Inverted Duty Structure.

Section 54(3) of the CGST Act, 2017 allows the refund of such unutilized credit at the end of any tax period i.e. the period for which GST Return is required to be furnished. As per the GST Council meeting, no refund of unutilized ITC under the CGST Act in respect of services rendered by way of construction of a complex, building etc. will be provided with effect from 01.07.2017. In addition to that, ineligibility is also attracted to the export of goods/services made under Letter of Undertaking (LUT) Bond or supplies to an SEZ unit (i.e. Zero-rated supplies made without payment of tax) as well as outward supplies under IRS as they are dealt with by separate rules of Refund (sub-rules 4A or 4B).

Formula proposed to calculate the Maximum Refund which is equal to:

{(Turnover of inverted rated supply of goods and services) × Net ITC ÷ Adjusted Total Turnover} – Tax payable on such inverted rated supply of goods and services, where

‘Net ITC’ is the ITC availed only on inputs other than supplies covered under sub-rules (4A) or (4B);

‘Adjusted Total turnover’ is the turnover in a State/UT, excluding the exempt supplies and supplies covered under sub-rules (4A) or (4B).

However, as per a few GST commentaries, it is notable that unutilised ITC on Capital Goods and Input Services will be ineligible for refund. Also, traceability of eligible inputs in case of mixed inputs could be an issue to calculate the correct amount of ITC as not all inputs may have a higher rate of tax than the tax rate on output.

In fact, the process to claim a refund of ITC has been made easier and quicker; a welcoming relief to the taxpayers as it helps reduce working capital. Application for refund shall be filed in Form GST RFD-01A which is to be submitted within 2 years from the end of financial year in which such claim for the refund arises.

Following documents need to be submitted to the jurisdictional authority:

  • Copy of the Form GST RFD-01A
  • Refund ARN Receipt
  • Undertaking to pay back the refunded amount if any discrepancy arises
  • Statement including the number & date of invoices issued and received
  • Declaration/Certificate that the incidence of tax has not been passed on to any other person, in a case where the amount of refund claimed does not exceed/exceeds INR 2,00,000/-

An initiative by GST Council to speed up refunds for ensuring the ease of doing business in India, a mechanism lauded by most of the taxpayers.

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