The Inverted Duty Structure (IDS) is a condition in which the input tax rate used is higher than the finished products tax rate. The tax rate on natural rubber (input) bought is 10 percent, taking a hypothetical circumstance of the tire industry, while the tax rate on rubber tyres is 5 percent. Here, because the input tax rate is higher than that of the finished product, an inverted tax structure occurs.

Usually, the tax on the inputs used is smaller than the tax rate on finished goods. In the case of customs duties, the inverted duty structure is commonly prevalent (import duty).

What is GST’s Inverted Duty Structure?

In GST as well, the same inverted duty structure condition exists. Understandably, inputs may be used by a manufacturer to manufacture his finished product. The tax rate for inputs, however, may be higher than for finished goods. Therefore, under GST, the inverted duty structure means that the inputs (inward supplies) used to have a higher GST rate than the finished goods GST rate (outward supplies).

Simply put, this indicates that the GST rate for raw materials has a higher tax rate, while the finished goods GST rate is lower.

Lawful Terms on refund due to inverted duty structure

The right to claim reimbursement for ITCs accumulated as a result of the Inverted Duty Structure is granted under Section 54 (3) of the CGST Act, 2017 which reads as under:

Section 54 (3) – Subject to the provisions of subsection (10), a registered person may claim a refund of any unused tax debt at the end of any tax period: Provided that no unpaid tax credit refund is allowed in exceptional circumstances––

(i) estimated non-taxable assets;

(ii) where the debt is accumulated as a result of a higher tax rate than the sales tax rate (excluding limited or unpaid provision), other than the provision of goods or services or both notified to the Government on Council’s recommendations:

Provided that no refund of the unused used tax credit will be allowed in cases where exports to India are subject to export duty:

It is also provided that no refund of the import tax credit will be allowed if the supplier of goods or services or both of the intervening mechanisms in respect of the middle tax or refund of the integrated tax claims paid on such use. ”

In view of the above provision, it is clear that any registered person may claim a refund of the accumulated ITC due to the Inverted Duty Structure.

What are the problems with the current modified work structure under GST?

The disputed work structure creates a few administrative problems in our GST system.

(1) Taxpayers will have accumulated credit in the form of refund requests from the Tax Department.

(2) The reversal of employment is the loss of government revenue as it has to repay the tax already paid (input).

(3) Under the GST, an opposing employee’s property is identified by goods and not services. In other words, there is a recognition of ‘good input’ and not ‘input services’.

Understand that an important part of the GST system is the input tax debt that a manufacturer can incur. This means that the manufacturer can deduct the already installed tax (and paid while the well-finished producer buys the input) from the input and must pay the remaining tax on the finished product.

However, when raw materials are used to attract high activity and finished goods have low performance, the finished product manufacturer must receive a tax refund for the inputs made.

GST refunds in the event of a dispute in the form of a dispute

In terms of Section 54 (3) of the CGST Act, 2017, a registrant may apply for a refund of the unused tax debt due to Inverted Duty Structure (Input Tax Rate> Export Tax and Disbursement Services) at the end of any tax period. The tax period is the period during which a refund is required. In the following cases no refund of the unused tax credit will be allowed:

  • Where zero-valued or entirely excluded supplies are production supplies.
  • If the products are exported from India, the export duty is applicable.
  • Where the provider of products or services, or both, has a disadvantage in respect of the central tax or demands the IGST refund on certain supplies.
  • Vide notification No. 15/2017- Central tax (rates) has been informed that no refund of the unused input tax credit is permitted in the case of a supply of construction services pursuant to subsection (3) of section 54 of the said Central Goods and Services Tax Act.
  • Vide notification no 5/2017-Central Tax (Rate): following the supply of goods or services as notified by the council.
Sr.No.Tariff item, heading, subheading, or ChapterDescription of Goods
15007Woven fabrics of silk or of silk waste
25111 to 5113Woven fabrics of wool or of animal hair
35208 to 5212Woven fabrics of cotton
45309 to 5311Woven fabrics of other vegetable textile fibers, paper yarn
55407, 5408Woven fabrics of manmade textile materials
65512 to 5516Woven fabrics of manmade staple fibres
760Knitted or crocheted fabrics [All goods]
88601Train locomotives that are powered by an external source of electricity or electric accumulators
98602Other railway locomotives; locomotive tendering operations; diesel-electric locomotives, steam locomotives and tendering operations;
108603Self-propelled coaches, vans and trucks of the railway or tramway, rather than going 8604
118604Maintenance or operation of rail or tramway vehicles, whether self-propelled or not (for example, workshops, cranes, ballast tampers,trackliners, testing coaches and track inspection vehicles)
128605Not self-propelled railway or tramway passenger buses; baggage vehicles, post office coaches and other special purpose train or tramway coaches, not self-propelled (excluding those of heading 8604)
138606Railway or tramway goods, not self-propelled vans and wagons,
148607Sections or rolling stock of railway or tramway locomotives, such as bogies, bissel-bogies, axles and wheels, and parts thereof,
158608Fixtures and fittings for railway or tramway tracks; mechanical (including electro-mechanical) signaling, safety or traffic control equipment for railways, trams, highways, inland waterways, parking lots, port or airfield facilities; parts of the following

After all, Via Notification No. 20/2018-Central Tax (Rate), dated 26.7.2018, the Government has allowed the accumulated ITC to obtain a refund claim form 1 August 2018 due to the inverted duty structure due to the supplies obtained from the items specified in Serial No. 1, 2, 3, 4, 5, 6 & 7. But accumulated unused ITC shall lapse until 31 July 2018 on inward supplies in respect of the products referred to above. By doing so, this government has authorized the accrued demand for a refund on ITC due to the textile industry’s inverted duty structure.

Refund for Inverted Duty Structure under GST 

Any registered individual may demand repayment of an unused ITC in respect of the Inverted Duty Structure at the end of any period of taxation in which the loan has been assembled for a representation of the input tax rate higher than the output supply tax rate.

Refund of unutilized ITC should not be allowed in these cases:-

  • As informed by the Government on the recommendations of the Council, production supplies.
  • Exported goods are subject to export duty.
  • Refund of supplies claimed under the Output Tax Payable IGST Act
  • If the retailer uses the IGST refund on materials.

Calculation of Maximum Refund available

  • ‘Adjusted total turnover’ means that, as explained in section 2(122) of the CGST Act, turnover in a State or a Union territory excludes the value of exempt supplies other than inverted-rate supplies during the relevant period.
  • ‘Net ITC’ means the ITC used inputs during the time in question rather than the ITC used inputs for which the refund is sought under sub-rules 4A or 4B.
  • ‘Tax payable on the supply of goods and services at inverted rates’ means tax payable on the supply of goods and services at inverted rates under the same heading, i.e. IGST, CGST, and SGST, respectively.
  • ‘Turnover of the supply of goods at inverted rates’ means the value of the supply of goods at inverted rates created during the relevant time.

Refund Claim Procedure

GSTN has issued “Circular No. 125/44/2019 dated 18.11.2019 and Circular No. 135/05/2020 dated 31.03.2020”. The circular states that the guiding principles and procedures for the refund need to be done electronically.

Forms GSTR-1 and GSTR-3B are required to be included in the tax period when the taxpayer wants to apply for an ITC refund.

An application for a refund must be submitted on the approved RFD-01A form. It is a temporary return form attached to the RFD-01 application area until the online site is allowed to apply for a refund. RFD-01 is required to be filed within 2 years from the end of the financial year in which the application for a refund is made.

Inclusive Steps-

  • Complete the RFD-01A form on the GSTN website. The Application Reference Number (ARN) code will be generated by the site.
  • Download the printed form of the duly completed application form and the ARN code generated on the portal.
  • Submit documents with supporting information to the relevant authorities.
  • The tax officer will process and evaluate the refund application. After a successful process and test the refund of the application will be paid by hand.
  • If the powers of the state or central government are not yet fixed, the taxpayer will go to the Nodal official of the appropriate state.

Inverted Duty Structure in GST- Uncertainty looms over refund:

An opposing job structure refers to a situation where the input tax exceeds the tax on the output. Currently, Central Laws do not provide any debt collection revenues due to different tax rates, especially if the tax rate on the input exceeds the tax rate on the output.

Consideration of the provisions of Section 38 (2) of the GST Act, 2016

Section 38 tax refund

Subject to the provisions of subsection (8), a taxpayer may claim a refund of any unused tax liability at the end of any tax period:

Provided that no refund of unused expenditure tax debt will be allowed in non-export cases or in cases where the debt is accumulated due to the tax rate on the input higher than the resulting tax rate:

It is also subject to the fact that no refund of unused used tax credit will be allowed in cases where goods exported to India are subject to export duty.

In the case of refunds due to the structure of the services used, the refund of the input tax credit will be provided as follows –

Maximum Reimbursement Amount = {(Profit of the estimated supply of goods sold) x Net ITC Total Total Adjusted Exchange} – tax payable on the estimated supply of goods

Definitions. – For the purposes of this by-law, the terms “Net ITC” and “Total Adjusted Profit” shall have the same meanings given to them in the GST rules.

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

  • Applications for refunds shall be submitted in the form RFD-01A on a monthly basis.
  • If the turnover of taxpayers is up to 1.5 crores and he has opted for a quarterly return, then he can file a quarterly refund application.
  • RFD-01A must be filled out within a period of two years from the conclusion of the financial years in which such a refund demand occurs.
  • Refund requests can be made by clubbing successive calendar months/quarters for one calendar month/quarter.
  • It can not, however, be clubbed between months/quarters of various financial years.

Conclusion 

Budget 2021-22 stated that particular duties were reduced from 2.5 percent to zero on certain medical devices to correct the inverted duty rate. In addition, some taxpayers are confused because of issues needing attention in different GST laws and one of them is reimbursement of accumulated credit in the case of an inverted GST duty structure. For more details associated with the inverted duty structure, you can log in to our website services LegalRaasta.Our expert team will assist you in each part related to GST registration, Trademark Registration, Company Registration, and its services relatable. You can download our app which is easy to access in android mobiles LegalRaasta APP. Also, you can give us a call at 8750008585 and feel free to send your query on Email: contact@legalraasta.com