The term inverted duty structure refers to a situation where the tax rate on input materials is higher than the tax rate applicable to the final product being sold. However, this scenario does not apply uniformly across all industries. This article explores the concept and its compliance requirements.

Inverted Duty Structure in the Pre-GST Era

Before the introduction of GST, an inverted duty structure occurred when the import duty levied on raw materials used in manufacturing was higher than the duty imposed on the finished goods.

Example of an Inverted Duty Structure Case:

• Import duty on tyres (Finished Product) = 10%

   

• Import duty on natural rubber (Raw Material) = 20%

   

Other Examples of Inverted Duty Structure:

Inverted Tax Structure Under the GST Regime

The Inverted Tax Structure occurs when the GST rate on inputs purchased (i.e., GST paid on raw materials) is higher than the GST rate applicable on outward supplies (i.e., GST payable on sales).

Example of Inverted Tax Structure Under GST:

Refund in Case of Inverted Tax Structure Under GST

A registered taxpayer can claim a refund of unutilized Input Tax Credit (ITC) when the GST paid on inputs exceeds the GST payable on output supplies. This refund can be claimed at the end of any tax period where such an accumulation occurs. A tax period refers to the period for which a GST return is filed.

Exceptions Where ITC Refund Cannot Be Claimed:

A refund of unutilized ITC is not permitted in the following cases:

1. If the output supplies are nil-rated or fully exempt, except for certain notified goods and services as per the GST Council’s recommendations.

    

2. If the goods exported from India are subject to export duty.

    

3. If the supplier has already claimed a refund of output tax paid under the IGST Act.

    

4. If the supplier has availed duty drawback or IGST refund on such supplies.

    

Formula for Calculating Maximum Refund Under Inverted Tax Structure

Maximum Refund=(Turnover of inverted rated supply of goods and services×Net ITCAdjusted total turnover)−Tax payable on such inverted rated supply\text{Maximum Refund} = \left( \frac{\text{Turnover of inverted rated supply of goods and services} \times \text{Net ITC}}{\text{Adjusted total turnover}} \right) – \text{Tax payable on such inverted rated supply}Maximum Refund=(Adjusted total turnoverTurnover of inverted rated supply of goods and services×Net ITC)−Tax payable on such inverted rated supply

Illustration:

• 
  Turnover of inverted rated supply: ₹1,400

   

• Applying the refund formula:

   

(1400×1201400)−70=50\left( \frac{1400 \times 120}{1400} \right) – 70 = 50(14001400×120)−70=50

Thus, the maximum refundable ITC in this case is ₹50.

Various Terms Used in the Computation of Maximum Refund Amount

To accurately compute the maximum refund amount under the inverted tax structure, the following terms are used:

a. Turnover of Inverted Rated Supply of Goods

This refers to the value of inverted rated supplies (goods or services) made during the relevant period without payment of tax, under a bond or letter of undertaking (LUT).

📌 Example: In the case provided earlier, the turnover of inverted rated supply of goods = ₹1,400

b. Net Input Tax Credit (Net ITC)

Net ITC represents the total input tax credit (ITC) availed on inputs during the relevant period. However, it excludes ITC for which a refund is claimed under sub-rules (4A) or (4B) or both.

📌 Example: From the earlier example:

50+120−50=₹12050 + 120 – 50 = ₹12050+120−50=₹120

c. Adjusted Total Turnover

“Adjusted Total Turnover” refers to the total turnover within a state or union territory, as per Section 2(112) of the GST Act, excluding:

• The value of exempt supplies (except zero-rated supplies)

   

• The turnover of supplies for which a refund is claimed under sub-rules (4A) or (4B)

   

📌 Example Calculation:

1500+1400−1500=₹1,4001500 + 1400 – 1500 = ₹1,4001500+1400−1500=₹1,400

📌 Turnover in a State or Union Territory includes:
✔ All taxable supplies (excluding inward RCM supplies)
✔ Exempt supplies made within the state/UT
✔ Exports of goods or services
✔ Inter-state supplies from that state/UT
❌ Excludes: CGST, SGST, IGST, UTGST, and cess

d. Tax Payable on Inverted Rated Supply of Goods

This is the tax amount payable on inverted rated supply under the applicable GST heads (IGST, CGST, SGST).

📌 Example Calculation:

1400×5%=₹701400 \times 5\% = ₹701400×5%=₹70

e. Relevant Period

The relevant period refers to the tax period for which the refund claim is being filed.

How to Claim a Refund of Unutilized ITC?

Freelancers and businesses eligible for a refund of unutilized Input Tax Credit (ITC) must follow specific procedures. Below are the key steps and requirements for claiming the refund.

a. Prerequisites for Claiming a Refund of Unutilized ITC

Before filing a refund application, the taxpayer must:
✔ File GSTR-1 and GSTR-3B for the relevant tax period for which the refund application is being made.

b. Which Form to File for Claiming a Refund of Unutilized ITC?

📌 Form to be filed: RFD-01

💡 Note: RFD-01 is an online application form available on the GST portal for claiming refunds.

c. Time Limit for Filing a Refund Claim

📌 Deadline: RFD-01 must be filed within two years from the end of the financial year in which the refund claim arises.

d. Step-by-Step Process to File a Refund of Unutilized ITC

Step 1: File RFD-01 on the GST Portal

• Log in to the GST portal and fill out the RFD-01 form to apply for a refund.

   

• Once submitted, an ARN (Application Reference Number) will be generated.

   

Step 2: Print the Filed Application

• Download and print both the filed RFD-01 application and the ARN Receipt generated on the GST portal.

   

Step 3: Submit the Application to the Jurisdictional Authority

• Visit the jurisdictional tax authority and submit the printed RFD-01 application along with the required supporting documents.

   

Step 4: Application Processing & Refund Approval

• The tax official will review the refund application.

   

• Once verified and approved, the refund amount will be disbursed manually.

   

Step 5: Contact Nodal Officer (if Required)

• If the jurisdictional authority has not been allotted, reach out to the Nodal Officer of the corresponding State/Centre for further processing.

   

How to Track the Filed Refund Application?

Tracking the status of a filed refund application is simple and can be done through the GST portal using the following steps:

✔ Download PDFs of Filed Applications (ARNs):

• Navigate to Refunds > My Saved/Submitted Applications on the GST portal.

   

• Download the PDFs of filed applications along with their respective ARNs (Application Reference Numbers).

   

✔ Track the Status of the Filed Application:

• Go to Refunds > Track Application Status on the GST portal.

   

• Enter the ARN to check the real-time status of your refund application.

   

Issues and Contentions in Refund Calculation

1. Complexity in Refund Computation for Manufacturers

• In the manufacturing sector, businesses may have multiple inputs with varying tax rates:

   

  • Some inputs have a lower tax rate than output supplies.

     

  • Some inputs have the same tax rate as output supplies.

     

  • Some inputs fall under the inverted duty structure (where tax on inputs is higher than the output).

     

• Due to these variations, it is challenging to match each input with a corresponding output, leading to potential miscalculations in refund claims.

   

2. Refund of Accumulated Credit Under Inverted Duty Structure

Is the Refund Available Only for Inputs with a Higher GST Rate Than the Output?

• The explanation to the refund formula states:
  
  
  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.
  

   

• This definition does not explicitly restrict the refund to only those inputs that have a higher tax rate than the output supplies.

   

• Therefore, for the purpose of refund calculation, the entire ITC on inputs (irrespective of their GST rate) can be considered.

Refund of Input Tax Credit (ITC) Under GST

Businesses often accumulate unutilized Input Tax Credit (ITC), which must be carried forward to the next financial year until it can be adjusted against output tax liability. This can lead to higher tax costs for businesses and an indirect increase in costs for consumers. To address this, Section 54 of the GST Act allows a refund of unutilized ITC under the Inverted Duty Structure.

Relevant Provisions in the GST Act

1. Section 54 – Refund of Tax (Chapter XI – Refunds)

According to clause (ii) of the proviso to Section 54(3) of the Central Goods & Services Tax Act, 2017 (CGST Act):

• A refund of ITC is permitted when the tax rate on inputs is higher than the tax rate on output supplies (except for nil-rated or fully exempt supplies).

   

• However, this excludes certain notified goods and services as recommended by the GST Council.

   

2. Rule 89 – Application for Refund (Chapter X – Refunds)

According to sub-rule (5) of Rule 89 of the Central Goods & Services Tax Rules, 2017 (CGST Rules), the refund of ITC for Inverted Duty Structure is calculated using the following formula:

📌 Maximum Refund Amount =

(Turnover of inverted rated supply of goods and services×NetITC÷AdjustedTotalTurnover)−(Tax payable on inverted rated supply×(NetITC÷ITC availed on inputs and input services))(Turnover \text{ of inverted rated supply of goods and services} \times Net ITC \div Adjusted Total Turnover) – \left( \text{Tax payable on inverted rated supply} \times \left( Net ITC \div ITC \text{ availed on inputs and input services} \right) \right)(Turnover of inverted rated supply of goods and services×NetITC÷AdjustedTotalTurnover)−(Tax payable on inverted rated supply×(NetITC÷ITC availed on inputs and input services))

3. Explanation of Key Terms

🔹 Net ITC:

• ITC availed on inputs during the relevant period.

   

• Excludes ITC for which a refund is already claimed under sub-rules (4A) or (4B).

   

🔹 Adjusted Total Turnover & Relevant Period:

• These terms have the same meaning as assigned in sub-rule (4) of Rule 89.

Procedure for Filing Refund Under Inverted Duty Structure

Businesses seeking a refund of Input Tax Credit (ITC) accumulated due to the Inverted Duty Structure must follow a structured filing process. The application must be filed within the prescribed time limit and meet all compliance requirements under the GST Act.

1. Time Limit for Filing Refund Application

• The refund application in Form RFD-01 must be filed within two years from the due date for filing the return for the period in which the refund claim arises.

   

2. Prerequisites for Filing Refund

To claim a refund of IGST/CGST/SGST on ITC accumulation, the following conditions must be met:

✔ GSTR-1 and GSTR-3B Returns Filed:

• The taxpayer must have filed GSTR-1 and GSTR-3B for the relevant tax period.

   

✔ Prescribed Statements Submitted:

• Statement 1 and Statement 1A of Form GST RFD-01A must be completed.

   

✔ No Drawback on Taxes Claimed:

• A refund cannot be claimed if a taxpayer has already availed drawback of all taxes under GST (IGST/CGST/SGST).

   

• A declaration confirming this must be submitted as part of Form GST RFD-01A.

   

3. Refund Amount Criteria

The refund amount to be claimed must satisfy the following conditions:

✅ Refund Amount Must Not Exceed Available Balance in Each Tax Head:

• The refund claim should be equal to or lower than the balance available in the electronic credit ledger for each head (IGST/CGST/SGST).

   

✅ Refund Amount Must Not Exceed the “Maximum Refund Amount” in Statement 1A:

• The refund claimed must be within the amount calculated in Statement 1A.

   

✅ Aggregate Refund Limit Check:

• The total refund must not exceed the balance available at the aggregate level in the Electronic Credit Ledger.

   

4. Example of Refund Calculation

🔹 Given Data:

• Maximum Refund Amount in Statement 1A: ₹1,00,000

   

• Balance in Electronic Credit Ledger at the end of the tax period:

   

  • CGST = ₹80,000

     

  • SGST = ₹10,000

     

  • IGST = ₹0

     

  • Aggregate total = ₹1,50,000

     

🔹 Refund Limit Calculation:

• The maximum refundable amount is determined by:

   

  • Maximum Refund Amount (Statement 1A): ₹1,00,000

     

  • Aggregate Balance in Electronic Credit Ledger: ₹1,50,000

     

  • Balance available at an individual level:

     

    • CGST: ₹80,000

       

    • SGST: ₹10,000

       

    • IGST: ₹0

       

✔ Final Refund Claimable: ₹90,000 (CGST = ₹80,000, SGST = ₹10,000, IGST = ₹0)

Restriction of Refund Under Inverted Duty Structure (IDS) for Certain Goods & Services

Certain goods and services have been restricted from claiming a refund under the Inverted Duty Structure (IDS) based on their HSN (Harmonized System of Nomenclature) classification. The following government notifications specify such restrictions:

Relevant Notifications Restricting IDS Refund:

1️⃣ Notification No. 5/2017 – Central Tax (Dated: 19/06/2017)
2️⃣ Notification No. 15/2017 – Central Tax (Dated: 01/07/2017)
3️⃣ Notification No. 29/2017 – Central Tax (Dated: 22/09/2017)
4️⃣ Notification No. 44/2017 – Central Tax (Rate) (Dated: 14/11/2017)
5️⃣ Notification No. 20/2018 – Central Tax (Dated: 26/07/2018)
6️⃣ Notification No. 9/2022 – Central Tax (Dated: 13/07/2022)

Important Considerations for Taxpayers

✅ Before filing a refund application under IDS, taxpayers should carefully review these notifications to determine whether their goods or services are specifically restricted from claiming a refund.

✅ It is also recommended to check for any updated notifications that may impose additional restrictions on IDS refunds.

Notifications & Circulars Issued by CBIC on Refunds Under Inverted Duty Structure (IDS)

The Central Board of Indirect Taxes and Customs (CBIC) has issued multiple notifications and circulars concerning refunds under the Inverted Duty Structure (IDS). Below is a summary of the key regulations:

Key Notifications & Circulars on IDS Refunds

Key Takeaways for Taxpayers

✔ Refunds are restricted to input goods only (excluding services & capital goods).
✔ Concessional tax rates do not prevent IDS refunds.
✔ The time period for refund applications was extended due to COVID-19.
✔ The refund formula under Rule 89(5) was revised in 2022.
✔ Bunching of refund claims across financial years is allowed.