written by Khatabook | January 31, 2022

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Know About Inverted Duty Structure under GST

What is inverted tax structure? In simple words, inverted taxation or duty structure means that the input tax rates are greater than the output tax rates for sale. However, it is not true for all industrial segments and products, and the GST refund on inverted duty structure has to be made manually. Therefore, let's know in detail about the GST inverted duty structure in this blog. 

Did you know? 

Although input and output services and goods were introduced under the 2017 GST U/R 89, a retrospective amendment of the GST inverted duty structure rule was made to specify the ITC refund of credit to inputs only.

The period before the GST

When the finished goods are made from raw imported materials, a situation arises where the tax rates on the input goods are much greater than the tax on the finished goods, which is called the inverted tax structure. Before introducing the Goods and Services Tax (GST), rubber tires are a good example to review and understand what is inverted duty structure is. The tax on natural rubber imported was 20%, whereas the tax on the import of tires was taxed only 10%.

Similarly, take a look at the table below to check out some other products with an inverted tax/duty structure:

Products

The import tax rate on

Finished Goods

Raw Materials

Finished Goods

Raw Materials

Modules for Solar Plants

Solar panels and components

Nil

5 to 10%

Seaweed products

Agar gum

10%

30%

Cultured dehydrated media

Various kinds of microorganisms

10%

30%

Electrical Transformers

Tubes made from Steel 

7.5%

10%

Locomotive Railway Engines

Locomotive Engine Components

5%

18-28%

Fabric bags

Non-woven fabrics

5%

12%

Also Read: Know About ITC reversal under GST

The GST rationalisation

The GST regime sought to rationalise the ‘inverted duty structure in GST’ by allowing refunds of the unutilised ITCs or Input Tax Credits when in 2017 GST was introduced and U/R 89 allowed refund of credits for both goods and services. This means that a GST taxpayer can claim the Inverted tax ITC at any time when the tax has accumulated due to the inverted duty or tax structure. Here the meaning of tax period refers to a period that requires a return to be filed.

Exceptions to this condition of the inverted tax/duty structure are stated below:

  • All output goods supplied are fully exempt or nil-rated supplies except for services and goods supplied and notified by the GST authorities and Government.
  • Goods exported from India will be subjected to a levy of export duties.
  • When the supplier of the goods claims an output tax refund under the IGST Act.
  • When the supplier of the goods claims a duty refund or drawback of amounts paid under IGST Act on inputs and raw material supplies U/S 54 of the 2017 CGST Act, 2017 and U/R 89 of the 2017 CGST Rules.

Note that under the 2017 CGST Act U/S 54(3) the accumulated ITC refund is not on all ITS but is only on those items having inverted duty structure. Additionally, the Government may declare supplies where no accumulated ITCs will be refunded even under the inverted duty structure. For example, for construction supplies U/S 54-3 item  5, Sched-II, zero-rated supplies, export of fabrics, etc., stringent conditions are laid out to claim even a partial refund of the unutilized and accumulated ITCs.

The GST refund terms and calculation

The formula to be applied to calculate the maximum refunds allowable due to the inverted tax/duty structure is given below and can be easily calculated.

Max Refund = (Turnover of supply of services and goods having inversion of taxes) multiplied by the (Net value of ITC divided by the adjusted turnover total) minus the (Tax payable on supply of services and goods suffering inversion of taxes).

Consider this example to grasp the issue better

  • Output value on fabric bags supply or turnover = ₹1,400. The GST applicable is at the rate of 5%, equal to 1400×5% or 70₹. 
  • Now, the input value of the supply of Silk fabric is valued at ₹ 1,500, and the GST applicable is at the rate of 5%, which is equal to 1,500 at the rate of 5% or ₹75. 
  • But, the Silk yarn purchase value of ₹1,000 has a GST applicable at the rate of 5%, which is equal to 1,000 at the rate of 5%, which is ₹50. 
  • Also, the buying value of fabric of non-woven nature is 1,000 ₹ and has a GST applicable at the rate of 12%, which is ₹120.
  • Now in this scenario, the inverted tax/duty rated supply becomes ₹1,400, and the total refund is calculated as {(1400×120) divided by1400} - ₹70 or ₹50, using the formula mentioned above.

The terminology used in calculating Maximum Refund Amounts

Inverted Rated turnover of goods supply is the inverted rate of services or goods made in a relevant period with zero tax payment by providing an undertaking letter or bond. In the example used above, the inverted rated turnover of goods supply is ₹1,400.

Nett Input Tax Credits: The Nett Input tax credits are availed in a relevant period besides the ITC amounts availed with a refund under the sub-rules 4B, 4A or together. Refer to the example where this amount is equal to ₹(50 +120) - (₹50) or ₹120.

“Adjusted Gross/Total turnover” refers to the taxpayer's turnover in a Union or State territory, which is defined U/S 2 (112). This turnover excludes the nil-rated supplies value (but includes nil-rated supplies) along with the supplies turnover for which refund is sought U/R 4 A, B or both, during that specific relevant period. Referring to the example above, the adjusted total turnover is given by ₹(1500 + 1400 -1500) or ₹1400.

Turnover occurring in a Union or State territory U/S 2 (112) refers to the taxable supplies aggregate value (excluding inward supplies value with a tax on the RCM basis) plus the exempt supplies made within the Union or State by the taxpayer. The exports of services and goods or both plus the inter-State services and goods supplies made by the taxpayer are included while the taxes paid as IGST, SGST, CGST, UGST and Cess are excluded.

The tax payable due to inverted rated supplies are IGST, CGST and SGST where it is calculated in the example as 1400 @ 5% = ₹70.

The relevant period refers to the specific period the claim is sought.

Procedure to claim the refund of ITCs

The Prerequisites: To claim a refund due to the inverted tax/duty structure GST conditions to be fulfilled are given below.

  • GSTR-1, 3B for the relevant or specific period of the registered taxpayer has to be submitted.
  • An accumulated ITC should be there.

The requisite form to be filled: The relevant form for claiming is the RFD 01, which is also available online to file the refund claim.

Filing Time Limit: For the financial year in which the claim arises, the refund claim in RFD-01 can be submitted within 2 years after the FY end of the specific inverted duty period.

Step-by-step Procedure to file the refund claim

Given below is the step-by-step procedure to file your refund claims.

  • Firstly, complete the RFD-01 form and file it online on the portal. 

  • An inverted duty structure refund acknowledgement number, also called the ARN, is generated when the refund claim is filed on the GST Portal.
  • Next, use the ‘Print’ tab and copy the filled-in refund application form with the receipt or the Application Reference Number (ARN) generated after submitting the refund claim on the GST portal.

  • Ensure you keep a copy of the printed application and ARN number for your records and submit a copy of these along with necessary supporting documents of the inverted duty structure GST to the concerned GST authority.

  • A GST tax official will process the refund claim application, and when approved, the refund amount is paid to the taxpayer manually.
  • If the centre or state jurisdictional tax authority is not notified, then contact the Jurisdictional Officer-In-Charge of the centre or state where the refund claim is preferred.

Procedure to track your refund application claim

Here is what you need to do to track a refund claim application or your GST refund inverted duty structure claim status:

  • Log in to the portal using your ID and password.
  • Go to the My Submitted or Saved Applications tab in the dropdown box under the Refunds tab.

  • Download the concerned PDFs of the ARN numbered receipt and the refund claim form in RFD-01.
  • Use the ARN number of the completed refund application in the “Track Status” bar, which is found under the ‘Refunds’ tab, to track your application’s refund status.

Issues in Inverted taxation

There are several contentions and issues under the GST laws and rules regarding the inverted duty structure of GST of some industrial items like rubber, footwear, etc. Some of the noteworthy issues are as below -

An industry manufacturing a product may have variable tax rates for items that are used as multiple-input supplies. While some of these may have the inverted tax issue of having a greater rate than the tax on the output, others may not have an inverted tax structure. 

  • So, how can the outputs and inputs be correlated, and how should you file the refund claim? Will the ITC credit be available for all items or just the items with the inverted taxation structure? 
  • Again, there is confusion that the output tax is always lower than the input tax. 
  • Refunds are allowed only when the accumulated credit due to the inverted tax structure is allowed for only those inputs with a higher GST rate than the supplies outward. Should this be considered overall inputs?

The answer to this issue lies in the formula explanation used to calculate the refund amount. As per this, the Net ITC or tax credit availed on all the inputs for the specific period excluding the ITC already availed, or a refund has already been claimed U/S 4 A, B or both conditions read together. This means that it is not specific in stating that only the inputs with a higher tax rate than the outward supplies tax rates. Hence, the entire ITCs of all inputs must be considered when filing a refund claim application due to the inverted tax structure.

Recent developments

 Recently the GST Council’s 45th meeting held in Lucknow in September 2021, has proposed to correct the textiles and footwear inverted duty structures. This will cause the new GST rates of 5% to 12% to be applicable to them from January 1st, 2022. 

Also Read: Everything about 42ns GST council Meeting

Conclusion

GST is new and has helped rationalise taxes under the 2017 GST Act, Laws and Rules. One of the prerequisites of any refund claim due to inverted duty structure GST is that the GSTR-3B and GSTR-01 must be filed. Therefore, we hope we have clarified the inverted duty structure GST in this article. Do you have issues with payment management and GST? Install the Khatabook app, a friend-in-need and one-stop solution for all issues related to income-tax or GST filing, employee management and more. Try it today!

FAQs

Q: What are the prerequisites to claim an ITC refund?

Ans:

To claim a refund due to the inverted duty structure GST conditions to be fulfilled are given below:

  • GSTR-1, 3B for the relevant tax period of the registered taxpayer has to be filed.
  • An accumulated ITC should be there.

Q: What happens when the input tax is greater than the output tax?

Ans:

The Input Tax Credits accumulate when the output tax liability is less than the input tax paid. Such ITC accumulation gets carried over to the subsequent FY until the registered taxpayer utilises it to pay the taxpayer’s output tax liability.

Q: What is meant by inverted rated turnover?

Ans:

The Inverted Rated Supply Turnover is the inverted tax on the value of the supply of goods made by the taxpayer during the specific period the refund is being claimed.

Q: Are input services ITCs also refunded under the inverted tax structure?

Ans:

GST Rule 89(5) of the 2017 CGST Rules has by an amendment restricted the refund benefits to only goods and not services suffering from the Inverted Duty issue. It states “Goods” bought by the supplier and used in the final product suffering the Inverted Tax Structure. Thus, the tax refund on “Capital Goods” and “Services” cannot be considered for a refund of accumulated ITCs due to the tax inversion structure.

Q: What is meant by the inverted tax structure?

Ans:

An inverted duty structure means a tax situation in which the taxes on the final product or output is lower than the taxes on the inputs for the same. This results in an inverse accumulation of ITCs or input tax credits which are refunded to the taxpayer most times.

Q: What should I do if the jurisdictional authority state/centre is not allotted?

Ans:

If the centre/state of the jurisdictional tax authority is not allotted, then contact the Jurisdictional  Officer In Charge of the centre/state where the refund claim is preferred.

Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.

Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.