Inverted Duty Structure under GST

Since the inception of Goods and Services Tax (GST) i.e., 1st July 2017, the refund of the unutilized input tax credit on account of inverted duty structure under GST has undergone the following notable amendments

Particulars

Details

The formula under GST refund rules 89(5) as inserted

Maximum Refund Amount = {(Turnover of inverted rated supply of goods) X Net ITC ÷ Adjusted Total Turnover} – tax payable on such inverted rated supply of goods. 

Here, Net ITC means input tax credit availed on inputs and input services during the relevant period

Amendment introduced vide notification no. 21/2018- Central Tax dated 18th April 2018 (effective from 18th April 2018)

Maximum Refund Amount = {(Turnover of inverted rated supply of goods) X Net ITC ÷ Adjusted Total Turnover} – tax payable on such inverted rated supply of goods and services. 

Here, Net ITC means input tax credit availed on inputs during the relevant period other than input tax credit availed for which GST refund rules 89(4A) or rule 89(4B) claims.

Amendment introduced vide notification no. 26/2018- Central Tax dated 13th June 2018 (effective retrospectively from 1st July 2017)

Maximum Refund Amount = {(Turnover of inverted rated supply of goods) X Net ITC ÷ Adjusted Total Turnover} – tax payable on such inverted rated supply of goods and services. 

Here, Net ITC means input tax credit availed on inputs during the relevant period other than input tax credit availed for which refund is claimed under rule 89(4A) or rule 89(4B).

Amendment introduced vide notification no. 14/2022- Central Tax dated 5th July 2022

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

Here, Net ITC means input tax credit availed on inputs during the relevant period other than input tax credit availed for which refund is claimed under rule 89(4A) or rule 89(4B).

Due to the confusing amendments in the formula, different effective dates thereof and interpretational issues involved in the matter, the refund of unutilized input tax credit in case of inverted duty structure has got all the negative limelight.

Instead of referring to the earlier formula, for claiming a refund on account of the inverted duty structure, we will just go through the briefs due to which the new amendment in the formula is introduced and thoroughly go through the new GST refund formula of inverted duty structure introduced vide notification no. 14/2022- Central Tax dated 5th July 2022.

Supreme court judgement on GST refund

Inverted Duty Structure under GST judgement

Both the formulas prescribed vide notification no. 21/2018- Central Tax dated 18th April 2018 and notification no. 26/2018- Central Tax dated 13th June 2018 are the same. However, the later issued notification no. 26/2018- Central Tax dated 13th June 2018 has given retrospective effect to the formula.

As per the formula, net Input Tax Credit means input tax availed on inputs. Hence, in the case of an inverted duty structure, the refund of only input gets available. Accordingly, it goes without saying that the refund of the input service is not available.

Facing the above unjustness, the aggrieved assessee has taken up the matter with various higher authorities. The important ones and the rulings thereon are tabulated hereunder

Particulars

Details

Ruling

M/s. VKC Footsteps India Pvt. Ltd. vs. Union of India

Hon’ble Gujarat High Court

  • Judgement was given in favour of the assessee.
  • It was directed to allow the refund claim after considering unutilized input tax credit on input services also as a part of Net ITC.

M/s. Tvl. Transtonnelstroy Afcons Joint Venture vs. Union of India

Hon’ble Madras High Court

  • Judgement was given against the assessee.
  • It was held that exclusion of input service from the refund of an unutilized input tax credit is a valid exercise of legislative power.

Ruling of Hon’ble Gujarat High Court was challenged by the Union of India before the Supreme Court. To a sheer surprise, Hon’ble Supreme Court dismissed the ruling of the Hon’ble Gujarat High Court and affirmed the ruling of the Hon’ble Madras High Court.

Hon’ble Supreme Court held that “if the legislature had any intention of giving the credit of tax paid on input goods and input services, the legislature would not have restricted the scope of refund in inverted duty structure to only inputs”.

Despite of giving an unfavourable decision, Hon’ble Supreme Court acknowledged the anomaly in the formula covered under rule 89(5) of the Central Goods and Services Rules, 2017 and accordingly directed the GST council to take required corrective action.

Acting on the same, the 47th GST Council Meeting recommended to amend the formula of refund prescribed under rule 89(5). It was recommended to take into account the unutilized ITC of inputs and input services for payment of output tax on inverted rated supplies in the same proportion in which ITC has been availed on inputs and input services.

Thus, post the 47th GST council meeting recommendation, the new formula was notified vide notification no. 14/2022- Central Tax dated 5th July 2022. We will hereunder understand the said new formula.

How to calculate GST refund on inverted duty structure under GST

Inverted Duty Structure under GST formula

The amended formula as notified, vide notification no. 14/2022- Central Tax dated 5th July 2022, is –

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

The effect of the change in formula is that reduction of output tax on inverted rated supply is to be done in the same proportion in which input tax credit has been availed on inputs and input services.

Going through the illustration provided hereunder one can easily understand the position of refund of inverted duty structure both pre-amendment and post-amendment.

Inverted Duty Structure under GST : Refund formula with example

Inverted Duty Structure under GST position

Suppose, the total Input Tax Credit is INR 1,00,000. Out of it –

  • Input tax credit on input is INR 60,000; and
  • Input tax credit on input service is INR 40,000.

The total turnover is INR 10,00,000. Out of it –

  • Turnover of inverted duty supply is INR 2,00,000; and
  • Turnover other than inverted duty supply is INR 8,00,000.

Output tax on inverted duty supply is INR 10,000 (INR 2,00,000 * 5%)

Calculation as per earlier formula –

Maximum Refund Amount = {(Turnover of inverted rated supply of goods) X Net ITC ÷ Adjusted Total Turnover} – tax payable on such inverted rated supply of goods and services.

(2,00,000 X 60,000 ÷ 10,00,000) – 10,000 = 2,000

What is the formula after amendment?

Inverted duty structure GST refund formula

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

(2,00,000 X 60,000 ÷ 10,00,000) – (10,000 X 60,000 ÷ 1,00,000) = 6,000

It can be noted that the anomaly of non-availability of refund of unutilized input services in case of inverted duty structure is removed after an amendment is made effective in the formula prescribed under rule 89(5) of the Central Goods and Services Tax Rules, 2017.

Conclusion on Inverted Duty Structure under GST

No doubt the new formula introduced vide notification no. 14/2022- Central Tax dated 5th July 2022 has rightly taken into account and made available the refund of unutilized input services in case of an inverted duty structure. Still, some important clarification is needed in the matter.

Notably, the said notification no. 14/2022- Central Tax dated 5th July 2022 is silent about the effective date hence the new formula will be effective from 5th July 2022.

Accordingly, some of the issue which needs clarifications are –

  1. What about the refund of unutilized input services of the prior period?
  2. Can the effect of the new formula be given to the cases which are still pending under litigation?
  3. Which formula should be taken into consideration for the prior period refund claim which is still pending to be filed as of 5th July 2022?
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CA Poonam Gandhi

About the author

Poonam Gandhi is a Chartered Accountant and a Lawyer. She is a Professional Freelance Content Writer/ Editor and an Educator.

She masters in creating result-oriented as well as Search Engine Oriented Content. Currently, she is associated with some of the topmost leading sites of India.

She holds more than 3 years of experience in the content field. Before entering the content writing field, she possessed a wide practice experience of more than 9 years, specifically, in the field of Indirect Taxation.

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