Input Tax Credit Refund – Inverted Tax Structure under GST regime

Last Updated at: March 16, 2020
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When the Goods and Services Tax was introduced, it subsumed within it, many central and state-level levies in the nature of indirect taxation such as value-added tax, service tax etc. While the introduction of the Goods and Services Tax, one of the biggest tax reforms in India, has simplified the tax regime, improving logistics and compliances, it is not without its own specific issues. One such contentious issue is the input tax credit refund. In this post, we assess what is an inverted input tax credit refund, situations leading to its generation and how you can manage your taxation liability in this specific scenario.

What is Input Tax Credit?

An input tax credit is a refund received for the tax paid on inputs, which eventually go into making the final product which is liable to GST payment. Since the legislative and economic objective behind the introduction of the Goods and Services Tax was to do away with double taxation – also called cascading effect of taxes, the credit received as refund ensures that tax is not paid twice on the same commodity. Let us assume that a company in India manufactures laptop. Assuming that the raw materials incurred for the manufacture are Rs 100 on which GST is levied are taxed at the rate of 20 %. So, input tax paid on acquiring materials would be Rs 20. Suppose the company sells this laptop as a product in India for Rs 120 on which GST rate is 5%, so the tax being Rs 6 is passed
on to the buyer of the laptop (that is 5% of 120).

In such a situation, an input tax credit of Rs 20 cannot be adjusted fully against an output tax liability of only 6/-. The credit of Rs 14 (Rs 20-6) may be adjusted with another output tax liability or be claimed as a refund. Now, assuming that the company exported all of its laptops to the United Kingdom. Since the company cannot bill GST onto his foreign customers, under the current export mechanism, the company has to pay Rs 6 to the government at the time of export and can later claim a rebate of the same amount. Balance of Rs 14 can be claimed as a refund. In this process, no amount of GST is passed onto the buyer and the entire tax paid on the purchase of raw materials may be claimed back.

What is an inverted duty structure under GST?

In a regular GST transaction, input goods, let’s say for a cookie manufacturing company – sugar, wheat, chocolate powder etc would be subject to a lower duty as compared to the finished product – packaged cookies. However, there are situations where the GST rate on the inputs may be higher than the rate fixed by the taxation authorities on the final finished product. In such a situation, there arises a mismatch between a higher outflow of tax paid on input goods and a lower refund received on finished goods. This entails a tax liability on the manufacturer – and hence, is called an “inverted input tax credit” under the Goods and Services Tax.

Get Online GST Registration

Consequence of an inverted input tax credit

In case the accumulated tax credit arises as a consequence of higher tax on inputs (such as non woven fabrics subject to 12% duty) than the finished product (fabric bag at 5% duty) – the registered person can claim refund of the accumulated input tax credit, at the end of the tax period.

How can a person or a business claim such a refund – Practical aspects

  • Only a registered taxpayer under the GST database can file for a refund.
  • The registered person needs to file the refund claim with the jurisdictional tax authority
  • to which the taxpayer has been assigned as per the administrative order issued by Chief Commissioner of Central tax and Commissioner of State Tax.
  • The tax refund claim in such a scenario will be admissible only if the same has been filed within a period of two years from the relevant date.
  • Rule 89(2)(h) of CGST Rules, 2017 stipulates that a refund claim on account of accumulated Input Tax Credit (where such accumulation is on account of inverted duty structure) has to be accompanied by a statement containing the number and date of invoices received and issued during a tax period.
  • Formula for calculation of Maximum Refund Amount = (Turnover of inverted rated supply of goods and services X Net input tax credit / Adjusted total turnover) – Tax payable on such inverted rated supply of goods and services
  • In case there is a mix of inputs – some of which are higher than the final rate and some are lower, the entire gamut of inputs will be considered for calculation of refund, not just those that are chargeable to a higher duty.
  • Form RFD 01A has to be filed with relevant supporting documentation and can be tracked using the Track Applications Status on the GST Portal
  • Since the process is entirely online, the tax department usually processes the refund online and remits the same.

Situations where no input tax credit refund is available on account of the inverted structure

In the following circumstances, despite higher tax on inputs, no claim can be entertained

  1. In case of input services, as services being amenable to varied pricing are not covered under the inverted tax refund restructure.
  2. Capital goods are outside the purview of “inputs”, as the tax department considers only consumables going into the final product as inputs for determining the refund.
  3. Nil rated or fully exempt supplies of goods or services are also outside the realm of an inverted tax refund of input tax credit.
  4. Despite meeting the above three conditions, a claim may be denied if it pertains to items specifically mentioned in notification no. 05/2017- Central tax (rate) dated 28.06.2017 that includes items such as woven cotton, corduroy, railway equipment etc.

Way Forward

When the government rolled out GST, over a year ago with the objective of One Nation, One Tax, GST created waves in almost every industry because of the ambiguities and apprehensions around switching over to a new regime. There is no denying that there are glitches in the processing of input credits and snags in the technical process that may add to the difficulties, albeit with the addition of provisions that entail 6% interest payment if the refund is not settled within 60 days. The refund process, however, is entirely online with minimum interface with taxation authorities.

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Input Tax Credit Refund – Inverted Tax Structure under GST regime

1656

When the Goods and Services Tax was introduced, it subsumed within it, many central and state-level levies in the nature of indirect taxation such as value-added tax, service tax etc. While the introduction of the Goods and Services Tax, one of the biggest tax reforms in India, has simplified the tax regime, improving logistics and compliances, it is not without its own specific issues. One such contentious issue is the input tax credit refund. In this post, we assess what is an inverted input tax credit refund, situations leading to its generation and how you can manage your taxation liability in this specific scenario.

What is Input Tax Credit?

An input tax credit is a refund received for the tax paid on inputs, which eventually go into making the final product which is liable to GST payment. Since the legislative and economic objective behind the introduction of the Goods and Services Tax was to do away with double taxation – also called cascading effect of taxes, the credit received as refund ensures that tax is not paid twice on the same commodity. Let us assume that a company in India manufactures laptop. Assuming that the raw materials incurred for the manufacture are Rs 100 on which GST is levied are taxed at the rate of 20 %. So, input tax paid on acquiring materials would be Rs 20. Suppose the company sells this laptop as a product in India for Rs 120 on which GST rate is 5%, so the tax being Rs 6 is passed
on to the buyer of the laptop (that is 5% of 120).

In such a situation, an input tax credit of Rs 20 cannot be adjusted fully against an output tax liability of only 6/-. The credit of Rs 14 (Rs 20-6) may be adjusted with another output tax liability or be claimed as a refund. Now, assuming that the company exported all of its laptops to the United Kingdom. Since the company cannot bill GST onto his foreign customers, under the current export mechanism, the company has to pay Rs 6 to the government at the time of export and can later claim a rebate of the same amount. Balance of Rs 14 can be claimed as a refund. In this process, no amount of GST is passed onto the buyer and the entire tax paid on the purchase of raw materials may be claimed back.

What is an inverted duty structure under GST?

In a regular GST transaction, input goods, let’s say for a cookie manufacturing company – sugar, wheat, chocolate powder etc would be subject to a lower duty as compared to the finished product – packaged cookies. However, there are situations where the GST rate on the inputs may be higher than the rate fixed by the taxation authorities on the final finished product. In such a situation, there arises a mismatch between a higher outflow of tax paid on input goods and a lower refund received on finished goods. This entails a tax liability on the manufacturer – and hence, is called an “inverted input tax credit” under the Goods and Services Tax.

Get Online GST Registration

Consequence of an inverted input tax credit

In case the accumulated tax credit arises as a consequence of higher tax on inputs (such as non woven fabrics subject to 12% duty) than the finished product (fabric bag at 5% duty) – the registered person can claim refund of the accumulated input tax credit, at the end of the tax period.

How can a person or a business claim such a refund – Practical aspects

  • Only a registered taxpayer under the GST database can file for a refund.
  • The registered person needs to file the refund claim with the jurisdictional tax authority
  • to which the taxpayer has been assigned as per the administrative order issued by Chief Commissioner of Central tax and Commissioner of State Tax.
  • The tax refund claim in such a scenario will be admissible only if the same has been filed within a period of two years from the relevant date.
  • Rule 89(2)(h) of CGST Rules, 2017 stipulates that a refund claim on account of accumulated Input Tax Credit (where such accumulation is on account of inverted duty structure) has to be accompanied by a statement containing the number and date of invoices received and issued during a tax period.
  • Formula for calculation of Maximum Refund Amount = (Turnover of inverted rated supply of goods and services X Net input tax credit / Adjusted total turnover) – Tax payable on such inverted rated supply of goods and services
  • In case there is a mix of inputs – some of which are higher than the final rate and some are lower, the entire gamut of inputs will be considered for calculation of refund, not just those that are chargeable to a higher duty.
  • Form RFD 01A has to be filed with relevant supporting documentation and can be tracked using the Track Applications Status on the GST Portal
  • Since the process is entirely online, the tax department usually processes the refund online and remits the same.

Situations where no input tax credit refund is available on account of the inverted structure

In the following circumstances, despite higher tax on inputs, no claim can be entertained

  1. In case of input services, as services being amenable to varied pricing are not covered under the inverted tax refund restructure.
  2. Capital goods are outside the purview of “inputs”, as the tax department considers only consumables going into the final product as inputs for determining the refund.
  3. Nil rated or fully exempt supplies of goods or services are also outside the realm of an inverted tax refund of input tax credit.
  4. Despite meeting the above three conditions, a claim may be denied if it pertains to items specifically mentioned in notification no. 05/2017- Central tax (rate) dated 28.06.2017 that includes items such as woven cotton, corduroy, railway equipment etc.

Way Forward

When the government rolled out GST, over a year ago with the objective of One Nation, One Tax, GST created waves in almost every industry because of the ambiguities and apprehensions around switching over to a new regime. There is no denying that there are glitches in the processing of input credits and snags in the technical process that may add to the difficulties, albeit with the addition of provisions that entail 6% interest payment if the refund is not settled within 60 days. The refund process, however, is entirely online with minimum interface with taxation authorities.

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Avani Mishra is a graduate in law from the National Law Institute University, Bhopal. She qualified the Company Secretary course with an All India Rank 1 and is a recipient of the President’s Gold Medal for her academic distinctions. She also holds a B.Com degree with a specialization in Corporate Affairs and Administration.